Taking out a loan

The prospect of taking on debt can be nerve-racking, but borrowing money can also help you make life-changing purchases. From funding your higher education to buying a home to meeting other financial needs, most people borrow money eventually. It’s a good idea to remember that it is always a financial risk when you borrow money, so it is important to do your research before making this kind of financial commitment. If you aren’t sure you are ready to borrow money, check out the information below.

How to Prepare

Before you make any borrowing decision, it’s important to ask yourself whether the associated debt is necessary and to also have a plan for how you will pay it back. If it still seems like a good idea, you can get ready for the application process by getting familiar with your credit history.

It’s a good idea to request a copy of your free annual credit report well before submitting any applications, review it and dispute any errors you find. It’s also a good idea to check your credit scores (you can get two free credit scores, updated every 30 days, from Credit.com). If your score looks like it may deter you from qualifying for favorable loan terms, you can look for ways to build up your credit score before you apply.

Next, make a list of your purchasing goals for the next few years and try to assess where you may need to borrow money and how that could affect your budget and overall financial future.

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What to Look Out for

When it comes to taking out loans, it’s important to look at all your options. Comparison shopping can save you a lot of money. Look for a loan that meets your requirements and will result in monthly payments you can afford. Important factors to consider include interest rate, any prepayment penalties, and even insurance add-ons that can get rather expensive. Once you choose your loan, be sure you really know the terms and stay up to date throughout the repayment process.

Interesting facts

• The Evans family has found the perfect home to move into and plan on taking out a loan to pay for it. However, they quickly find, as usual, that that's easier said then done, when they run into trouble trying to perusade the banker.
• An origination fee, or activation fee, is a payment associated with the establishment of an account with a bank, broker or other company providing services handling the processing associated with taking out a loan.
  An activation fee is typically a set amount for any account. However, an origination fee usually varies from 0.5% (half a point) to...