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Preparing to Borrow for Individuals

In this day and age, you borrow without thinking much about it.  Borrowing money is a part of almost everyone’s financial lives.  You take out a mortgage to buy a new house and a line of credit to fix it when it’s old.  You go to the bank for an auto loan to buy a car and an education loan to send the kids off to college.  You use a credit card for almost everything else.  It’s safer and more convenient and you’ve come to regard it as an essential part of your lifestyle. 

But there are pitfalls.  Borrow without understanding the loan conditions and you may end up paying more than you should.  Borrow too much and you can spiral into debt.

Some fundamentals
To be better prepared to borrow, here are some simple questions you can ask yourself before applying for a loan or a credit card:

Do you really need to borrow?  Borrowing for necessities and things that provide long-term and lasting value should take priority over luxury items or things that provide only momentary or limited enjoyment.  It is easier to justify borrowing for a home or a college education than borrowing for a second vacation or a great outfit that you may only wear occasionally.

Do you understand your responsibility?  Money borrowed must be repaid along with interest.  Unpaid monthly credit card balances will incur hefty interest charges.
Can you make the credit or loan payments?  Spend time to find the loan with an interest rate and terms that best fits your needs.  Then assess your financial situation and make a realistic budget that includes your loan or credit payments.

Getting ready
Before filling out a loan application or meeting with a loan or mortgage officer, here are some items you may want to gather:

Your credit report 
Most lenders will automatically order a credit report.  You should know what it contains.  You can get a free copy of your credit report by logging onto the website www.annualcreditreport.com.  Or, for a small fee, you can order your credit report from the three major credit reporting agencies.

Proof of income 
Depending on the type of loan, you may need to provide a copy of a recent payroll check stub or a W-2 from the prior year.

Tax return 
If you are applying for a mortgage or a large personal loan, you will probably need to supply copies of at least one federal tax return. 

Personal financial statement 
For mortgages and other large loans, lenders may require a financial statement listing all your assets and liabilities.  It is also a good idea to prepare a personal financial statement annually as part of managing your finances.

What lenders want
When lenders loan money, repayment includes interest charges.  Reasonable interest rates and clear and understandable terms are legal and fair business practices.  Responsible lenders also have a vested interest in seeing that you are able to meet your repayment responsibilities.  They will be looking for aspects of your finances that will allow them to approve your loan.

Stable employment 
A steady longstanding job provides lenders with assurances that you will have ongoing and reliable income to repay your loan.  If you have a history of several job changes, it may raise a cautionary flag, even though there may have been understandable reasons for those changes.  For example, if you have frequently changed jobs for better opportunities, be sure to explain those reasons.

Stable residence 
A stable residence suggests financial stability.  Lenders like to see at least six months of residence at the same place.

Responsible handling of other debts 
Having a solid history of timely and regular payments on previous or existing loans also helps give lenders confidence that you will be able to handle a new loan in the same manner.

Final words
While it is a necessary part of our lives today, the decision to borrow money should never be made without a thorough understanding of the terms of the transaction and serious consideration of the ramifications if we fail to repay a loan.  Proper preparation and an understanding of accepted credit practices will make the process easier, improve the chances of a loan approval, and secure more favorable terms.

The information provided is for illustrative purposes only and is not intended to constitute legal, financial or other advice. The accuracy of the calculators and its applicability to your circumstances is not guaranteed. You should obtain personal advice from qualified professionals.