When Borrowing Money:  Things to Know

Borrowing money—whether from a bank, credit card, friend, or another lender—comes with general rules and principles that help protect both the borrower and the lender.

But before we share those general principles, please know this article isn’t going to talk about borrowing money to buy a home. Borrowing money for a home has so many options and components (it’s complicated); we truly recommend working with a professional. Visit with a mortgage loan originator, preferably a Prevail Bank Mortgage Loan Originator. They understand (and can offer you) numerous different loan types (conventional fixed, variable ARMs, FHA, USDA, VA, and others) --- Some of which may only require a 3% down payment! They will share the pros and cons of each, the details that would be important to you, and the down payment assistance programs that could provide you up to $10,000! (An online mortgage lender wouldn’t do that.) We also think you will appreciate the transparency of the information they will provide on a continual basis, their personalized assistance, and their accessibility and commitment to you. Prevail’s Mortgage Loan Originators have been known to work with and help borrowers of all statuses save, improve their credit score, and then purchase their first home over the course of a couple of years. (How many financial institutions are that dedicated?) Prevail Bank is a solution seeker when home ownership is the goal. ------- Okay. End of Commercial. But seriously, a Prevail Bank Mortgage Loan Originator is the way to go.

For other types of loans, here's a breakdown of the key components and guidelines:

1. Borrow Only What You Can Repay

Of course, you don’t want to take on more debt than you can afford to repay based on your income and expenses. Lenders often call this your debt-to-income (DTI) ratio.  Having an established budget that you’re sticking to helps.

2. Understand the Terms

Before borrowing, you should clearly understand:

• Interest rate (fixed or variable)
• APR – Annual Percentage Rate (represents the total cost of borrowing money)
• Loan term (how long you have to repay)
• Down payments (lenders may require a down payment, especially for new cars or if your credit isn’t the best)
• Fees (origination, late, prepayment penalties)
• Repayment schedule (monthly, quarterly, etc.)

You will want to compare different products to see what meets your needs. In addition to monthly payments, look at the Annual Percentage Rate advertised to compare the total cost of different products to ensure you are getting the best deal.  When borrowing, you want a lower APR because it means you’ll pay less in interest and fees.

3. Credit Matters

Your credit score impacts whether you can borrow money and what interest rate you'll get. Typically, the higher your credit score, the better.

[Sidenote: Prevail Bank provides its customers free access to Credit Sense. Credit Sense provides them with their credit score, tips for how to improve their credit score, an understanding of how they’re spending their money, and will offer money management tips too --- especially if there is a goal (future purchase) identified.]

4. Secured vs. Unsecured Loans

• Secured: This means the loan is backed by collateral (e.g., your car, house, or some other big asset). If you don’t repay the loan as agreed upon, you risk losing whatever collateral you listed in the contract signed.
• Car loans are typically secured. Meaning if you don’t pay what’s owed as agreed, the lender can repossess the car.
• Unsecured: No collateral is involved with unsecured loans, but it usually means higher interest rates. 

5. Legal and Binding Contracts

Loans are typically formal agreements. Once you sign, you’re legally bound to repay.  If you borrow from friends/family, it’s still wise to have a written agreement.

6. Know the Consequences of Default

Defaulting means you stopped making payments owed in the manner agreed to.  Missed payments can lead to fees, interest hikes, credit damage, collection actions, and/or legal proceedings.  If you have a secured loan, you could lose the collateral that was offered to guarantee repayment.

Don’t let this scare you. It’s standard practice. You’ll just want to establish a system of paying your loan on time, every time. Some banks, like Prevail Bank, offer Online Bill Pay which allows customers to set-up reoccurring payments, so they are on time, every time.

Keep in mind too, most lenders would prefer to be paid than to take back a piece of collateral. If you experience an emergency expense or job loss, reach out to your lender right away. Most would be willing to work with you and establish a new agreement.

If you’re already thinking your financial situation is too far gone, too out of control --- Don’t! With some tweaks and changes here and there, your financial situation can change for the better. If you’re interested, Prevail has numerous blogs related to saving and budgeting. If you prefer personal assistance, consider financial counseling. Google search for credit counseling agencies in your area; many non-profit organizations offer counseling as well. If you aren’t sure which ones in your area do, ask a neighboring church or your county’s health & human services department if they know. OR, visit with a Prevail Banker to understand what your options might be and what your roadway to success might look like. 

Prevail Bank is an Equal Housing Lender / Member FDIC