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How to Borrow Wisely

There are many excellent reasons to borrow money: for an emergency, to purchase a car or house, for education, or just to tide you over for a bit. But remember that credit costs money. Before you take out that loan, make sure you understand just what that borrowed money will actually cost you, and also understand what options are available to you. You want to stay in control of your credit and loans, not have them control you.

Interest rates
When you borrow money, the lender—whoever it is—will charge you interest on your loan. Your loan interest rate will vary depending on a number of factors.

Short-term vs. long-term:
Debt (what you owe on your loan) falls into two categories, short and long-term. Long-term debt is what you incur when you take out a loan to purchase a house, for example, or a car. The interest rate on long-term loans is much lower—in single digits right now–than on a short-term loan, but of course you are making payments for a much longer time. Short-term debt is due anywhere between 30 days or a few months. The annual interest rate on short-term debt can be much higher—frequently 20 percent and up.

Calculating interest:
Lenders have different ways of calculating interest, and this can have a big impact on how much you’ll spend over the life of the loan. Get acquainted with these methods—you’ll need to identify them in the fine print of a loan contract. Your interest calculation may be based on one of the following:

  • On your Adjusted Balance: This is the amount you owed at the beginning of the billing period minus any credits or payments made during that period. New purchases are not included in this amount.
  • On your Average Daily Balance: Probably the most common method—this adds your balances for each day and then divides that total by the number of days in the billing period, minus any credits or payments made during that period. New purchases might or might not be included.
  • On your Previous Balance: This bases your interest charge on the amount you owed at the end of the previous billing cycle.

Understand your credit card:
Remember that using your credit card is exactly like taking out a small loan to make that purchase. Read through your credit card contract and make sure you understand all the features and fees:

  • Your Annual Percentage Rate (APR), and if your rate is fixed or variable
  • Annual fee, late fees, and over-limit fees
  • How your interest rate is calculated
  • What Grace Period you have before interest starts accruing on new purchases
  • How your Rewards are calculated (Note: Rewards credit cards typically charge a good-sized annual fee, so make sure the reward is useful to you, and that the benefit will cover the cost of the annual fee.)

Choose your lender:
Do your research, and be especially careful if you are looking for a short-term, or micro-credit, loan.

  • Go to a lender with a physical storefront. Online lenders are more expensive, and you can’t talk face-to-face with a real person. Nor do you have the security of knowing where they do business.
  • Research and be clear on the company’s lending policies. These should be available online, in their location, and in their contracts. Read the policies carefully, so you know what is expected of you.
  • Is the lender a member of an overseeing, responsible financial association? For example, PayDayHawaii is a member of the Financial Service Providers of Hawaii association. You can read the business and lending standards we abide by here.
  • Do some checking on the company. Google them to see if any complaints pop up, or check them through the Better Business Bureau, where you’ll be able to see if they are properly licensed and if any complaints have been lodged against them.

Alert: Be aware of garnishee orders, which allow credit providers to deduct repayments from your salary, if you have defaulted on your original debt repayment arrangement.

A few final guidelines:

  • Borrow only what you need.
  • Remember that short-term loans and credit cards are not simply additional income.
  • As a rule of thumb don’t borrow more than 20 percent of your income (not counting your rent or mortgage payment) or you could run into trouble repaying your loan or paying off your credit card.
  • Read through any loan agreement, including credit cards, before signing.
  • Make sure you know just what your loan will cost you in total.
  • Have a plan for paying off your loan and total debt.

Questions? Just stop by any PayDayHawaii location for more information on any of these topics.

You can also now follow us on Twitter at @PayDayHawaii

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