If you’re in a bind financially, you may think of borrowing money. Family members and friends are usually the first options, but if they can’t lend you any money, you may turn to money lenders.
Before you decide to borrow money, it helps to know these five common mistakes that borrowers make. Take the necessary steps to avoid these mistakes, and you won’t be trapped in debt.
Not checking their credit score
Your credit score is one of the most important metrics for borrowing money. The higher your credit score, the more money lenders and banks will trust you to pay back what you owe.
Your credit score improves each time you make timely payments on loans and other dues. For example, you have a credit card and you always pay the entire bill each month before the due date. Consistently being on top of your monthly dues will give you a healthy credit score.
Conversely, if you incur late payment charges often, or if you miss a few payments, your credit score suffers. The more late or missed payments you have, the lower your credit score gets. And if you have a particularly low credit score, you are less likely to be approved for loans.
To avoid the disappointment of disapproval, it pays to find out what your credit score is first. You can request a credit report from Credit Bureau Singapore (CBS) for $8 plus Goods and Services Tax (GST). Once you know your credit score, you will have an idea how likely you will be approved for a loan. Also, you will know how much money you can borrow.
Neglecting fees and Effective Interest Rates (EIRs)
Most banks and money lenders only tell you the annual interest rate (AIR) of their loan products. But the AIR does not accurately reflect the true cost of the loans. What you should be looking at is the Effective Interest Rate (EIR).
The EIR takes into account additional charges like administrative fees, late payment charges, and the like. With that, the EIR is always higher than the AIR of any particular loan product.
To easily determine the EIR of a loan, you can use several online EIR calculators. Shop around and find money lenders that charge reasonable EIRs.
Borrowing more than necessary
It’s always tempting to loan more than what you actually need. More so if banks or lenders offer special perks for higher principal amounts. But borrowing more than you need is always a bad idea.
For one, you will have to pay off more than necessary. And if you can’t keep up with your payments, you’ll incur lots of interest. None of these are good for your financial health.
Thus, the wise step to take is to borrow only the amount you need. If you’re expecting additional expenses, then borrow only a little more as a buffer fund. Let’s say you have a hospital bill totaling $7,000. If you expect a few other charges down the line, you can borrow $8,000 to give you a $1,000 reserve fund. That’s better than borrowing $14,000 or double the amount you actually need.
Paying only the minimum each month
Loan repayments have minimum amounts you have to pay off each month. This is common with credit cards, and some money lenders have similar arrangements.
While it’s lighter on your budget to pay off only the minimum amount each month, this will bite you in the back later on. This is the fastest way to rack up interest charges, and soon enough you will find yourself with a mountain of interest to pay off. That’s on top of your principal amount, so you may end up even deeper in debt than before.
To avoid this, make sure you can pay off the full repayment amounts per month. Don’t settle for just the minimum payment. This way, you can get rid of your debt faster.
Conclusion
Any time you decide to borrow money, you must be wise and prudent about it. Borrow only what you need, and make sure the terms of the loan are within your capacity to repay. Be wise about the lender you choose as well, as not all loans are created equal.
