The Basics: How to be a Smart Borrower

Why should you be a smart borrower? Let's first talk about the potential effects of bad debt:

- Negative reports to credit reporting agencies resulting in a lower credit score. This in turn affects future access to credit and the terms of such credit including lower credit lines, higher interest rates, and faster repayment terms.
- Reduced access to future credit.
- Higher interest rates on loans.
- Lower credit lines.
- Accelerated repayment terms.
- Reduced ability to obtain business loans.
- Increased difficulty in renting a house or apartment.
- Increased anxiety and family stress.
- In some cases, your credit history can affect your ability to obtain certain jobs.

How You Can Be a Smart Borrower:

Complete your Budget: Visit the Budget Guide to get more information on the budgeting process. It is important that you avoid taking on too much debt. Set realistic spending and borrowing limits.

Understand your Rights: Understand your rights and responsibilities with respect to your credit and credit history. Three major laws – the Fair Credit Billing Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act – are designed to protect borrowers from unfair practices. For more information on these laws, visit the Federal Trade Commission website at www.ftc.gov/bcp/menus/consumer/credit.shtm.

Beware of Predatory Lenders: Many predatory lenders promote their services to people who may be financially distressed. Payday loan companies are notorious for this type of practice. Many payday loans carry effective interest costs that exceed amounts being borrowed. These types of loans are nearly impossible to repay in the long term. These types of lenders charge high rates of interest and use aggressive sales and collection tactics.

Don’t be Pressured: Never be pressured into acting quickly on any loan or offer for credit. You should employ the practice of walking away from a sales pitch in order to evaluate the offer privately. When it comes to credit, don’t assume that just because you are approved for a credit card or loan that it means that you can afford them. Your prospective lender may try to advise you on your ability to afford such loans. While they may be giving you good information, keep in mind that it is in their best interest to make you the loan and maybe not in your best interest to borrow from them based on your overall situation or long-term plans.

Understand your Loan Agreement: Make sure you understand all of the important points of your loan agreement. The most important points usually include:

• Total amount of the loan. Sometimes the amount you receive and the amount of the loan obligation are not the same amount. The difference can be additional fees charged.
• Is the loan secured by any assets?
• What is the monthly payment amount?
• Interest rate including the stated rate and annual percentage rate (APR).
• Are there any additional fees and costs associated with the loan?
• What is the term of loan?
• Is there a fee for early termination?

Use Caution in Borrowing Against Your Home: For things such as home improvement expenses that increase the value of your home, borrowing money secured by your house can be a good financial strategy. It allows you to align the amount of debt secured by your house with the value of the house. The interest cost may also be tax deductible. You still need to be sure that the amount of the expense is in line with your budgeted allocation for this type of monthly cost. Home loans with high interest rates, interest only payments, adjustable rates, negative amortization (reverse mortgage), and balloon payments, can be especially risky. Although these types of loans may make sense for your situation, use caution and seek professional assistance in obtaining advice on their use.

In most cases it is not a good idea to get a home loan to repay credit card debt. If you are considering a loan for this purpose, consult a financial professional first to evaluate your situation.