LOAN PLANNING TOOL - Keys to Successful Borrowing
- Your credit profile and credit score has a major impact on what interest rate you will pay for any type of loan. Before you apply for any type of loan know your score and check your report: annualcreditreport.com
- Be sure you understand all of the costs associated with the product, such as the interest rate, fees for late payments, penalties for repaying the loan early, and any other charges that may apply. You will want to know when your payments are due and how to make your payments. And, you will want to know who you should contact if you have any questions about your loan.
- What Type of Loan Should I Get? - While there are many different types of loans available, there is usually one type that will work the best in any given circumstance. Student loans are best for education, auto loans are best for cars, etc. And for miscellaneous expenses like medical bills, debt consolidation and more, personal loans are usually the way to go.
- Keep in mind that it’s best to take out a loan only when it’s a necessary expense, suc Tool h as buying a car or house, paying for medical bills, or refinancing existing debt. Using them for vacations or purchasing big luxury items beyond your means can lead to racking up unnecessary and expensive debt. That won’t be good for your wallet or your credit score.
Loans vs Other Types of Borrowing Options
Loans aren’t the only way to borrow. There are several other ways to finance a purchase, or otherwise afford it, such as a credit card, line of credit or gifted funds.
- Loan vs. credit card: With a credit card, the cardholder is never obligated to borrow money and only pays interest on balances they carry from month to month. Plus, the card remains open indefinitely.
- Loan vs. line of credit: A line of credit is like a credit card without the physical card. The person who opens a line of credit only has to pay interest on what they borrow, and they aren’t obligated to borrow. However, some lines of credit may have a set “draw period” during which the borrower can take out money.
- Loan vs. gift: Loans require repayment, while gifts do not. Gifts are taxable, but it’s the person giving the gift who pays the tax. Gift givers only need to report gifts on their taxes if they give more than $15,000 to any individual person/place in a year (e.g. they can give gifts of $10,000 to multiple places without needing to report it). And they likely won’t have to actually pay tax on gifts of $15,000+ because everyone has a lifetime tax exemption on $11.4 million worth of gifts.