Home > Managing Debt > 5 Things You Must Consider Before Borrowing Money

Comments 0 Comments

It seems that people are getting loans all the time — for homes, cars, college, house renovations, even new business ventures. Borrowing money can be great when you need an immediate infusion of cash, but it doesn’t come without risks. Check out some of the following dangers associated with borrowing money.

1. High Interest Payments

When you borrow money, you are obviously required to repay the original, or principal, amount back, and in nearly all cases, you pay more than that. There will also be interest, meaning you eventually pay for the lending service. You may get a low rate (or for some balance transfer credit cards, a 0% interest rate), but interest rates often make borrowing an expensive move. Rates change regularly so you want to borrow when there is a favorable borrowing market. And, of course, it is usually better to use your own savings rather than going into debt.

2. Credit Damage

Each time you decide to borrow money, you risk damaging your credit score if you don’t repay as agreed. But if you make on-time payments, a loan or credit card can be a credit builder. And your credit score impacts many other aspects of your financial life. It can affect your ability to get future loans, the rates you secure on those loans, whether you can rent your dream apartment and more. It’s a good idea to check your score and work toward improving it. (You can get a free credit report summary, along with two credit scores, updated monthly, from Credit.com.)

3. Strained Relationships

While you’re more likely to get a better deal from a friend or family member, taking a loan from them can lead to a number of awkward situations. It can get difficult for the person to ask for the money back and you may feel a slight sense of guilt or obligation each time you see the “lender.” While this method can help you secure a lower rate, it’s a good idea to have clear rules and a written agreement around any exchange of money. And as much as you can, it can help to stay in touch about other things so your relationship doesn’t get reduced to just a financial transaction.

4. Feeling Stuck

Taking money from a lender requires signing an agreement and making a commitment to pay a certain amount back each month. After that it’s important to make your payments on time. This means even if you borrowed money for something years ago and your needs and desires have changed, you still have to continue payments until the balance is paid in full. Having these obligations can make you less attractive to new creditors and potential investors in the future, depending on what the loan type is. Be sure you can handle the life of the loan before you sign on the dotted line. Refinancing is an option in some situations, but it won’t eliminate your debt, just restructure it.

5. Less Flexible Budget

Lastly, owing money to a lender will impart cash flow limitations on your future income. Over the designated term of your repayment period, you are assigning a certain amount of your money to repaying your debt. The funds may seem essential at the time you start your loan, but you are effectively eliminating part of your future proceeds or earnings during the repayment period. You don’t know what you may need this cash for in times to come. If you take a loan, budget the minimum repayment amount into your budget and check regularly in case you can up the payment to end this cash flow limit once and for all.

Whether you turn to a friend, family member, bank or another financial institution, it’s important to be aware of the implications of your borrowing money before you start.

More on Managing Debt:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team