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The Rules of Borrowing Money from Financial Institutions

There’s always a need for money, either for personal expenses or for business needs. Sometimes no matter what you do, you just simply can’t make ends meet. This is where borrowing comes in. You might simply need a loan to fund your immediate financial needs. However, you should also keep in mind that borrowing money from financial institutions comes with a big responsibility. It can greatly affect your credit standing in a positive or a negative way.

Financial Advice

What to keep in mind when taking a loan

Below are some simple rules to keep in mind should you decide to borrow money from banks or other financial institutions. Follow them and you will never find yourself enslaved to debt.

  • Do not borrow more than what you can pay.

If you do so, chances are, you will not be able to pay them. Loan proceeds may be an extra source of fund but never let 50% of your income go to loan payments. Just borrow what you need. Do not live beyond your means. Do not treat a loan as a luxury but consider it as a responsibility.

  • If possible, shorten the tenure of the loan.

You read it right- if possible. This will benefit you as it will save you from long years of paying the loan. Also, some loans have lower interest rates when paid in a short period of time. In this way, you can save your money from paying additional interest charges. Taking a loan is negative compounding. The longer the tenure, the higher is the compound interest the bank earns from you. When you apply for a loan, ask yourself, “How many years do I plan to pay it?” Set your goals. Now, remember that there are certain kinds of loans which have really long tenure. A good example is a housing loan which takes years of payment. Even so, try to maximize the loan proceeds and find a way to pay the loan in the shortest time possible.

  • Do not borrow for luxury or investment.

It doesn’t even make sense to borrow if you don’t need the money. Your credit card company may offer you a good travel package through a loan. It can be tempting. But remember that those wants are better fulfilled through saving up. It is better to suffer now, then enjoy later than the opposite. It is also not wise to use borrowed money for investment. Even the safest investments cannot match the interest charges of your loan. Try to set aside a portion of your monthly income for your investments.

  • Make sure to pay regularly.

This is the hardest rule of borrowing. It pays to be disciplined. If you can, pay as early as possible. You don’t have to wait for your due date to pay for your loan. If you have the means to pay it in advance, do so. This will help you establish a good credit standing which you can use when you need another loan in the future.