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Responsible Borrowing

When borrowing money, you are looking to form a mutually beneficial relationship with your lending institution. Both lender and borrower must uphold their side of the bargain. Just as lending institutions are mandated to follow the regulatory framework, borrowers must practice Responsible Borrowing.

As a borrower, consider that you are entering into a legal agreement with your lending institution when signing on the dotted line. While you expect the lender to execute all arrangements impecably, they too expect something in return: their money! So, pump the brakes and take inventory of what you are getting into before you proceed.

Responsible Borrowing: Steps for Success

First and foremost, determine if you are in a position to borrow. Explore your financial situation and plan accordingly to ensure that a loan is the best option given your circumstances.

Financial health and the way you handle your personal financial responsibilities play an integral role in your ability to make choices and have less financial stress throughout your life. Who doesn’t want options? With foresight and planning, sound financial health is yours. Think strategically—and with a little tough love.

Do You Need to Borrow Now?

You may want to, but do you need to? Is there another way to meet your financial demands? Can you put aside extra savings and wait until you have accrued what you need?

Can You Afford to Borrow?

In other words, will you be able to repay your debt at regular intervals throughout the term of the loan? Assess your outstanding debt and consider paying it down prior to taking out a credit. Remember, you are not paying back principal only: interest and fees factor in. The bottom line is the loan will need to be repaid. If you are strapped with other debt, why sign on for more? Clean house first. Use an online loan calculator to find out what a loan will cost.

Credit History and Credit Score

Request your credit reports and estimate your credit score. If necessary, correct whatever needs correcting. Knowledge is power: When you know your credit score, you can talk to lenders on an equal footing. If a certain lender offers rates that you know to be too high for your credit range, walk away and seek a better situation.

Bonus: In today’s online world, data and identity breaches are not uncommon. Checking your credit history (at least annually) is a proactive step in safeguarding your identity.

Calculate Your Debt-To-Income Ratio

Lenders look at your debt-to-income ratio (DTI) when evaluating you as a possible borrower. Know before you go, and shop for loans with your number at the ready. Calculate your DTI by dividing recurring monthly debt by gross monthly income:

Don’t Overborrow

Have great credit? Congratulations! Your lending institution may inform you that you qualify for a more massive loan than you intended to assume. But, just like a kid in the candy store whose eyes are bigger than their stomach, don’t be tempted to take on more debt than you can afford only because you qualify for it. Make sound choices.

Stay on Schedule

Loan installments are contractual. Timely payment will positively influence your credit history, while late or missed payments will negatively affect your credit.

Keep in Touch with Your Lender

Life can get messy when least expected. If you are unable to make a payment on time, get in touch with the lending institution. Don’t bury your head in the sand and avoid the reality of your financial life. Face it, deal with it. Lenders can potentially help with alternate arrangements when unfortunate circumstances strike.

Have a Cushion

Keep money in savings for emergency use only. Expecting the unexpected is an aspect of financial self-care. Sock away savings and be ready for lean times.
TIP: Experts suggest having three to six months’ worth of expenses stashed away. The figure will vary according to lifestyle, income, dependents, monthly living expenses, etc.

Borrowing money can ease things temporarily, but make sure to be strategic with your financial planning and make sure your circumstances enable you to repay your debt on time (or before). Conducting due diligence in choosing when and how to borrow money will stave off undue financial stress down the line.