What to know before you borrow

Getting the money you need

Almost everyone needs a loan at some point during their life. Therefore, it’s smart to know something about the process and what to expect before you apply.

You might borrow money so you can:

  • Pay for college or trade school.
  • Finance a large purchase, such as furniture or appliances.
  • Buy a home.
  • Finance a vehicle purchase.
  • Consolidate credit card debt.
  • Manage an unexpected expense, such as medical care or a big car repair.

The cost of borrowing varies. For example, there may be origination fees (money paid at the time of closing). Interest rates fluctuate based on market trends, your credit score, whether you have collateral and how long the loan will last. 

Applying for a loan

Before you borrow, you can check to see whether you have a credit report, and what the score might be.  If you’ve taken out a student loan or been added as an authorized user on someone else’s credit card, as examples, you should have a credit report.  You can request a free credit report at annualcreditreport.com.

Once you know where you stand, it’s easier to find a loan that fits your credit profile and financial need. Understand the annual percentage rate (APR) and determine if the monthly payment amount would fit within your budget.

When applying, expect to give personally identifying information such as your name, Social Security number, birthdate and address, as well as information about your current income and other financial obligations like monthly rent or daycare costs.

Types of loans

The purpose of your loan can determine which kind of loan is appropriate. Some examples include:

  • Personal loan from your financial institution: These loans don’t typically require collateral, meaning there is nothing a lender could repossess if you don’t pay as agreed. If you can get a personal loan to pay off credit card debt with a lower-interest-rate personal loan, it could save you money.

Pro: Flexibility, you can use it for whatever you want, including to consolidate other debt.
Con: There may be fees you did not expect, including origination fees.

  • Personal line of credit: These work similarly to credit cards, with a limit on how much you can borrow and interest rates that can vary. In many cases, you access it via special checks.

Pro: Flexibility; you can use it when you need it.
Cons: You may need a checking account with the institution that offers it, and a good or excellent credit score is typically required.

  • Buy now, pay later (BNPL): These offers are typically made to online shoppers as they check out. If approved, you can defer payments but still receive the item you want upfront. In most cases, these don’t require a hard credit check.

Pro: This model is generally interest-free if paid on time.
Con: Not having to pay up front might tempt you to overspend.

  • Secured loans: Collateral (meaning, some property at risk) is pledged by the borrower to secure repayment. Mortgages and auto loans are typical examples. If the loan payments aren’t kept up, the property might have to be forfeited.

Pro: The insurance of collateral means that rates are generally lower.
Con: You lose your property if you default on the loan.

Borrowing options to avoid

Some of the loans that are easiest to get might be considered predatory. Some are actually scams according to the Federal Trade Commission (FTC). These include:

  • Car title loans “usually have an average monthly finance fee of 25%, which translates to an APR of about 300%,” according to the FTC.  These short-term loans are not only costly but also risky because if you can’t pay the loan back, you will lose your vehicle for good.
  • Payday loans, also known as cash advance loans or check loans, generally charge a certain fee per $100 borrowed. They also have a rollover feature if the money is not repaid in 14 or 30 days, or whatever the term may be.
  • Advance-fee loans require you to pay a fee before you get your money in exchange for a guaranteed approval regardless of your credit score. Scammers take advantage of people who are having difficulty obtaining a loan and who want to believe there is an easy way to get one.

The best way to ensure you get the right loan for your needs and budget is to do plenty of research beforehand and understand the benefits and risks of each loan type.

This page and the information contained herein is for educational purposes only. The information is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any product, service, or strategy to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional. Any links to other websites are included for your convenience only. Bread Financial does not endorse any product or service, and is not responsible for the accuracy or reliability of the information, made available through such sites.

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