Preparing to Borrow

Before you borrow, you'll want to take a careful look at your overall financial situation and ask yourself a series of questions. Those questions will vary somewhat, based on the type of loan you're considering. But they're all linked to the same issue: Can I afford to borrow and will it be worth the cost?

A good test may be to ask yourself these questions:

• Do I really need the item I'm borrowing to pay for or is it just something that would be nice to have?
• Is the loan I'm considering the most appropriate type of loan for this purchase?
• How much will this loan cost?
• Will I be able to pay off the loan without a financial strain?
• What if I get turned down for the loan?

What is important to remember is that borrowing only when you need to and choosing a loan product that fits your situation keeps your borrowing costs as low as possible and has a positive impact on your overall financial situation.

Fitting a loan into your budget

When you're trying to "live within your means" and spend less than you earn, you have to consider the impact of adding new loan payments to your monthly budget. You don't want this new obligation to interfere with your ability to pay other bills or to save money each month.

For example, will making these new loan payments mean you have to sacrifice in other areas of your life? There may be places where you can easily save enough, on things like eating out, to cover the added expense. Or, if you plan ahead, you may prepare to borrow by downsizing to a more economical car.

What you don't want to do is have to stop or scale back on any savings you're currently able to set aside, either in an employer's retirement savings plan, an individual retirement account (IRA) or other account. That's money you'll need to meet your medium- and long-range goals. You also want to be sure you have an emergency fund, with enough money to cover all of your monthly living expenses—including rent or mortgage payments—for at least three to six months.