Borrowing Wisely

Borrowing can help us achieve important goals in life, such as home ownership or higher education. Before you borrow, understand how to borrow wisely.

Basic Borrowing Definitions

Understanding these terms will help you make borrowing decisions.

Principal - The amount you borrow from the lender, before any fees or interest are applied. If you borrow $10,000 to buy a car, your principal amount is $10,000.

Interest - The money you pay the lender for the use of the money you borrowed. Interest is usually expressed as an Annual Percentage Rate (APR). Interest may be fixed, where it stays the same through the life of the loan, or variable, which fluctuates.

Secured loan - A loan for which you pledge some sort of collateral, like a house or car, which may be repossessed by the lender if you don't meet the terms of your repayment.

Unsecured loan - A loan for which collateral isn't required - you borrow on the strength of your credit standing. Credit cards and some personal loans may be unsecured.

Revolving loan - A revolving loan gives you continuous access to a credit source, up to your credit limit. You repay only the amount you've borrowed (plus interest on that amount), so your monthly payment varies, as does the amount available to borrow.

Installment loan - An installment loan has a fixed term (length of time); your monthly payments remain the same and, if you make all payments on time and in full, your loan is paid off within the specified timeframe.

What to Know Before You Apply

Lenders examine three things when deciding whether to lend you money:

• Credit History. Have you paid your bills on time and in full?
• Financial means. Can you afford the payments on the money you borrow?
• Current debt. How much do you already owe?

For help in determining how much you can afford to borrow, use our calculators:

Estimating my payment amount
Estimating what vehicle I can afford

Tips for Borrowing Wisely

• Make your payments on time and in full. It may be tempting to miss a payment, but doing so without the lender's permission will negatively impact your credit rating - and you'll pay more interest in the long run.
• Be aware of all fees that may apply to your loan or credit card. Loans may include up-front fees (such as origination fees), late fees and/or fees for early repayment. Credit cards may charge annual fees, late fees and additional fees for certain transactions like cash advances.
• A credit card is a loan. Purchases you make on a credit card must be repaid, with interest. Plus, your credit card balances count as part of your overall debt, which may keep you from qualifying for other loans.
• Shop carefully for your loan. You may be able to find a lower interest rate or more favorable terms.
• Be proactive in handling repayment problems. Contact your lender as soon as the problem develops; you may be able to work out a solution.