Not all debt is bad. In fact, as financial advisor D. Paterson Cope explains, there are plenty of loans that can be extremely beneficial and even a good investment, such as a conventional mortgage on a primary home.
No matter what type of loan you plan to take, for whatever financial need you have, it’s important to be a smart borrower. However, this isn’t as simple as it may at first seem.
There are many factors borrowers need to consider and plenty of pitfalls to avoid if you want to take a loan. Here are some ways you can be a wise and fiscally responsible borrower in what can be a financially dangerous world.
Know the Loan Terms
No matter how much money you want to borrow, there’s going to be a price to pay. Every lender is going to charge an interest rate, which is their price for taking the risk to lend you the money.
Loans aren’t just about the interest rate, though. You should fully understand all aspects of the loan to know whether it would be a good product for you.
The essential factors to consider are any closing costs, whether the interest rate is variable or fixed, what the due date of your payment is, and whether you’d be charged a penalty for paying the loan off early.
Don’t Borrow More Than You Need
Some loans will allow you to choose how much you want to borrow. Financial institutions that offer personal loans, for example, will approve you up to a certain amount.
While it may be enticing to take whatever money is offered to you, a good rule of thumb is to borrow only what you absolutely need. If you are seeking a loan to complete a home renovation project, only borrow the amount of money needed to complete the project, with a little extra for wiggle room, if possible.
Taking more money than you actually need can seem like a good idea, but it can easily get you in trouble, too. It will result in a higher payment and more interest charged in the long run.
Pay on Time Every Time
If you want to be a good borrower, you have to hold up your end of the bargain. That means paying at least your minimum payment on time every month.
Not only will the contract you sign — either digitally or in-person — require you to do so, but it will also set you up for future financial success. When you make on-time loan payments, you’ll be building and improving your credit. This will be very important if you need to take another loan in the future, as a better credit score often means a lower interest rate.
Shop Around
Today, you’ll have plenty of choices for lenders, no matter what type of loan you need. From financial institutions to online lenders, borrowers have the benefit of choice today.
D. Paterson Cope always suggests shopping around for the best loan terms. There’s nothing that says you have to accept the first offer extended to you. Take time to find the best loan with the best terms at the right company, and you’ll be setting yourself up for long-term financial success.
About D. Paterson Cope
D. Paterson Cope, CFP® is the founder and CEO of Cope Private Wealth, a financial planning and wealth management firm specializing in assisting retirees and people who are about to retire. D. Paterson Cope has been providing financial advice for more than 30 years. He first earned the designation of Certified Financial Planner (CFP) in 1997. When he isn’t working, he enjoys spending time with his wife, Jennifer Miree Cope, and the rest of his family in Mountain Brook.
