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Ever since I got my first credit card back in college, I’ve learned a lot about debt. The main reason is to protect myself and one day get out of debt. When I was younger, I didn’t always know what questions to ask. It actually wasn’t until I’d had a few meetings with a third-party financial advisor at the age of 25 that I really started to learn more, not only about personal finances, but about borrowing money as well.
Before you think about borrowing money, it’s always important to ask the following questions:
Am I able to make extra payments if I want, and will there be any fees if I do?
This can make a huge difference in how many years you are in debt or how much interest you end up paying. You may not have the money for extra payments now, but you could in the future. Some lenders will actually charge you large fees for paying your debt early. I know, it’s absolutely ridiculous.
What is the interest rate?
Whatever type of loan you’re getting, I recommend doing a little research on what normal interest rates are. I’ll give you a good example. Back when I was looking to consolidate my credit card debt, I kept seeing ads for a lender who advertised debt consolidation loans. Most consolidation loans in Canada are 7% to 12%. The average credit card interest in Canada is 18% to 22%.
The credit cards that I was trying to consolidate were included in that average. When I asked what my interest rate would be on the consolidation loan, can you guess what the answer was? It was 47% – 56% depending on a few more details that would be determined once I gave more in-depth personal information. The person I was talking to tried to tell me it was an amazing rate, and it would help me so much.
If I hadn’t known what a good interest rate was or the interest rates of my credit cards, if I hadn’t done my research, I might have believed her. The sad thing is, I was told this was the normal interest rate, and this is a reputable lender with advertising everywhere. I was lucky enough to know the basics, but it pains me that not everyone does.
(For more information on interest rates, you may want to read this book.)
What will my monthly payments be?
Before getting any loan, it’s important to know if you can afford the payments. Staying within your budget will make it so that you are less likely to need to borrow more money in the future.
Is there insurance for the loan, and how much is it?
Many loans offer insurance and factor it into your regular payment quote, not even telling you you’re paying for it. If you choose to pay for it, that’s up to you, not something I will tell you to do or not to do. If you’re going to do it, though, you should just be aware of that fact, so then, if you do need to use it in the future, you’ll know how it works.
Will my interest rate change, or is it locked in?
This is something important to know about borrowing money. Some loans will start with a low interest that may increase over time. A perfect example of this is credit cards that are off a balance transfer promotion. When you open the new card and transfer, you have a low interest of 12% for six months, but after that, it goes up to 22%. Combine that with the one-time fee, and is it really worth it?
Other types of loans have varying interests as well.
What happens if I miss a payment or have a late payment?
Knowing this in advance is great. You never know when you’ll have a financial crisis, and while it’s best to never miss a payment or be late, it, unfortunately, does happen. If you know it’s going to happen, though, try calling your lender as soon as possible because there may be a way for them to help.
For example, my car loan lets you skip one month’s worth of loan payments every calendar year. I found this out when I was really struggling financially and mentally, and in my time of need, this was a lifesaver. I wasn’t charged any fees for the payment bouncing (which totals about $100), and it’s just a payment extra I’ll be making at the end of my lease instead.
One last piece of advice on borrowing money
If someone starts getting annoyed that you are asking questions, just leave. Don’t let them pressure you into getting whatever it is your getting. If they don’t want to answer things for you, there’s probably a reason why, and that reason is that it will (excuse my language) really screw you over. Your financial well-being is worth taking the time to ask the right questions, find out the right information, and know exactly what it is you’re signing yourself up for.
Is there something you wish you’d known about borrowing money?
A lot of these lessons, like many, I learned the hard way. I truly hope that they can help someone else before they make a mistake that could majorly affect their future. Is there a question you always ask before you borrow any money? Share in the comments!
About Chloe Morgan
Chloe Morgan grew up living with a tight budget. In her late teens and early 20’s all the lessons she’d learned started to slip, like it does for many college age students on their own for the first time, and with their first credit card. As she’s gotten older, she’s started to deal with the repercussions and has taken on a frugal way of living, keeping her costs low, as she pays off debt and saves for her future. Chloe lives in Northern Ontario, Canada, with her cute dog, Rhea.