Most people need to borrow money at some point in their lives. Whether it’s for buying an expensive item we’d like to pay for over time, or going to college, or buying a first home, people borrow money all the time for different reasons.
Sometimes people think that borrowing money is bad and should be avoided at all costs. Going into debt you can’t get out of is less than ideal, but that doesn’t mean that borrowing money for legitimate reasons is bad.
Let’s take a look at some of the ways that borrowing money can help you reach your life goals.
1. Credit Card
The first time you borrow money will likely be to establish your credit. Credit cards are great ways to borrow money and pay for higher priced items. They must be used wisely however, as the interest rates can be high!
Let’s say you want to buy a TV that costs $800, but you only have $200 each month to spend on it based on your budget. You can use a credit card to pay $200 each month for 4 months until you pay off the full cost. Keep in mind, you’ll also pay interest to the credit card issuer for lending you the money.
In the United States, a credit score is a number given to each individual determining how trustworthy they are with borrowing money. Establishing credit is very important, and you should try to get your first credit card around the age of 18. If you pay off the amount you spend in full every month, you will build credit and your score will improve over time. In turn, this will help you access more money you can borrow for things like a mortgage in the future.
Instead of using credit cards to pay for expensive items, it’s better to spend within your means and pay off your credit card bill every month. That way, you’ll build credit without losing money to interest.
2. Student Loan
Student loans are a common way to pay for a college education. While student loans can be burdensome after graduation, they can also provide a great opportunity for people to get a degree that otherwise would be financially out of reach. The key is to study a subject that is in-demand in the job market. Student loans can be a great way to learn about money management after college.
3. Mortgage
Next up, borrowing money to pay for a house is also known as getting a mortgage. Home ownership is one of the key indicators of financial success in American culture. Even though more and more people realize that owning a home is much more expensive than it used to be, buying a home is still on the top of most people’s wish list. You can borrow money from the bank in the form of a 15, 20, or 30-year mortgage to pay for a home. Your credit score will determine the interest rate you pay throughout the course of the loan.
4. Personal Loan
A personal loan can be used in rare situations where you need to borrow money for unforeseen personal expenses. You can get a personal loan from the bank or from a peer to peer lending program like Lending Club. These can be tricky to get but allow you to borrow up to $50,000. You’ll have an easier time borrowing if you have collateral to declare, a high credit score, or high income. Interest rates can be high on these loans and there may be a penalty for paying it off early.
5. Small Business Loan
Lastly, if you run a small business or intend to launch one, a business loan can be helpful in getting your business finances up and running. Getting a new business off the ground typically takes some sort of financing and a business loan could be a way to bolster your own investment in a professional endeavor.
Questions to Ask
Before borrowing money, there are some key questions you need to ask to clarify the terms of the loan. Understanding the agreement you sign will make the experience of borrowing money all the more pleasant and avoid any onerous surprises.
- How long is the term of the loan?
- Is there a penalty for paying off the loan early?
- When exactly are payments due and how often? What payment methods are accepted?
- What is the interest rate of the loan? Is it fixed or variable?