5 Principles of Better Borrowing

Whether you're borrowing money for the first time, or have been borrowing for years, here are 5 principles that can help you borrow better:

1. Think about how borrowing can help you achieve your goals.

You probably have an immediate goal, such as purchasing appliances or buying a car. However, it's also a good idea to consider your financial goals for two, five or even ten years from now. For example, if you're planning a wedding two years from now, you may reconsider how much you borrow for a car today.

2. Determine how much you can afford to borrow.

To understand how much you can afford, create a budget. Calculate your monthly earnings minus your monthly expenses—the amount you have left over can be used to repay new debt. Remember to include fixed costs like rent, phone and utilities, variables like groceries and transportation, and discretionary spending like clothing and entertainment in your calculations.

• Try our Budget Calculator

3. Choose the borrowing solution that's right for you.

Consider how you manage your finances. For example, do you have a budget and stick to it? Does your salary vary from month to month? Are you likely to put extra money against your debt to pay it down quickly? Or would you benefit from a structured payment plan? Take time to consider what makes you the most comfortable when evaluating borrowing solutions.

When evaluating your options, be sure to look at the details. For example, "Buy now, pay later" offers may seem attractive, but a missed payment can incur hefty penalties and high interest rates. Be sure you will have the funds when payment comes due.

4. Have a repayment plan.

Know how long it will take you to repay what you borrow, and make sure the timing is in line with your goals. You don't want to still be paying for your car loan when the time comes to replace your car. However, when you spread out payments over a longer time period, borrowing can become more affordable on a monthly basis.

• Try our Loan Payment Calculator

5. Understand your true cost of borrowing.

Your true cost of borrowing will depend on how much you borrow, how long you borrow for, and your interest rate. Because your cost is a combination of factors, a low interest rate over a long term can actually end up costing more than a higher interest rate over a short term.

To reduce your cost of borrowing on existing debts, focus on paying down higher interest rate debts first, and increase your payments so your debt is paid off more quickly. And remember, by making your payments on or before your due date, you're automatically developing a strong credit history, which will help you borrow better in the future.

For more information, try our Debt Reduction Plan or read about Debt Consolidation.