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Taking Out A Loan
Bookmark this page and share it with others! (Or press Ctrl/D on Firefox)When Are You Ready For a Loan? Deciding when to take out your first loan is an important decision. How can you tell you're ready for a loan? Shall I go for it? "I won't buy a car until I can pay for it with cash," says Jess. She's 18 so she can legally sign for a loan now. But Jess doesn't want to be stuck with monthly payments while she's in school. That means she won't be buying a brand new car. In fact, she might not buy a car at all, but take the bus instead. She's still thinking about it. Is it when: * You get a fantastic credit card offer in the mail? * You just had your 18th birthday? * You just got a job? The answer isn't as simple as you think. "Congratulations...!" ...You qualify for a $5,000 loan immediately. Just fill in the enclosed card by… Wait! Proceed with caution! True, you need to qualify, but that's just a basic step. It must not take much to qualify if they can't even spell your name right on the envelope! When you dispose of those offers, protect your identity. Lots of offers congratulating you on qualifying will come into your mailbox—online and onland. They're not all in your best interest. Start with your credit union. You already have your accounts there, have a history based on those accounts, and they have the authority to approve or deny your loan application. Parents are good at this. It's a big deal to be a co-signer. Happy Birthday! Age is important. You must be 18 or older to be legally liable for signing a contract. "Legally liable" means that legal action can be taken against you if you fail to follow through on your promises. What about if you are under 18? Ask your credit union if they will allow you to borrow money with a co-signer. What's a Co-signer? A co-signer is someone who is 18 or older, who is qualified to sign the loan agreement. Whoever co-signs for you agrees to repay the loan if you don't. Close Not many financial institutions will allow someone under age 18 to take out a loan. Ask anyway—they may have some other, better ideas to help you get the money you need! How much do you make? Oh no! Don't let yourself get into this position! Many people have problems repaying first loans. Not having enough income to handle the payments is the first reason. Failing to account for rising expenses is another. Look critically at your expenses over the time you plan to borrow the money. For example, are you moving from your parents' home into an apartment? You'll discover you're paying more than just the rent! Unless you plan to give up food, toilet paper or television. Are you graduating from college or getting married? How will your loan payments affect these decisions? Use this readiness checklist to help you decide if you're ready to borrow money. Readiness Checklist Start by ask yourself these questions: Do I earn enough income to make loan payments? yes no Will I have trouble paying my other expenses on top of the loan payments? yes no Will I be able to maintain my current lifestyle and still make loan payments? yes no If your answers are no," regardless of your age, don't borrow the money. If your answers are yes, ask yourself more questions: Do I really need the item I'm borrowing the money for? yes no During the course of the loan, is there any chance my income may decline? yes no During the course of the loan, will my expenses increase? yes no Close Jess won't take out any loans because she doesn't need to, and doesn't want to. She doesn't want to build a bad credit history before she has her college degree. How do I get approval? Your credit union will approve your loan based on what is commonly known as the four "Cs" of credit. They are: College graduate Josh Jones talks about credit worthiness. Your credit union will approve your loan based on your credit worthiness Click me. * Character—your willingness to repay. Determined from your reputation and your credit history. Do you pay your bills on time? Have you used credit before? * Capacity—your ability to repay. Determined by looking at your employment and debt history. Do you have a job? Do you have other debts? * Collateral—what you'll give up if you don't repay the loan. Based on something of value you agree to forfeit if you default on your loan. It can be a car, a savings account, or a certificate of deposit (CD). * Capital—Your assets, or valuable items you own free and clear. What are you worth? Do you have other assets, such as a savings account, car, or CD that could be used to repay the debt? Credit unions, and all legal lenders, must follow strict lending laws that regulate the process. One thing they have to do is set conditions for determining whether or not a loan is approved. They can't base their decisions on other factors. Think about it—would you want your loan request to be determined by how you dress, your jewelry, if you're female or male, which church you go to, or where you live? Fortunately, the government makes sure that this information isn't a factor. What if you've decided you're ready to take out a loan? Once you've decided There are loans out there for just about anything you need. The most popular loans for high-school students are student loans for college, and smaller loans for cars. Student loans You can take out a student loan in either your name or your parent's name. The person in whose name the loan is taken out is usually responsible for paying it back. What about signing all those forms? What About Signing All Those Forms? When you reach age 18, you can legally sign contracts. Just because you can sign doesn't mean it's a good idea to jump on it! Signing a contract to borrow money can have far-reaching effects. Now's the time to learn to: * Never enter into a contract casually; * Always read the terms and conditions under which you are agreeing to pay the money back. Do you know how much your loan is costing you in terms of interest? When it comes to borrowing money, computing all the extras can be pretty confusing for many people. The confusion is also complicated by the fact that it is not always calculated the same way. In order to learn how to compute the interest rate on your loan, you need to read the contract terms. Your loan agreement would have the exact formula for making the calculations. For an example, let's say you want to figure out a certain loan interest amount for a period of one month. If the amount of your loan is $1000 and the interest rate on your loan is 5% per month, then to calculate how much your loan is costing you a month, multiply $1000 with .05 (which is 5%). Your answer will be $50. This is how much interest you are paying each month on that $1000 loan. The above calculation looks easy enough. However, it isn't as straightforward as that. In reality, loans are paid over a period of several months. Another point to remember is that interest rates can be compounded, so for that $1000 loan, you aren't really going to pay just $50 interest a month. You will actually be paying interest on the interest that accrues, until you completely pay off your loan. To know the full amount to be repaid, you have to use the correct mathematical equation, or you could be leaving a large proportion out of your financial budgeting. If you are already getting a little intimidated at the thought of calculating exactly how much the interest rate on a loan can cost you, you can make it easier on yourself by going to your lender and asking them to calculate the total cost for you. They will provide you with the full details before you commit yourself to any agreement. If there are two rates offered to you, make sure you know the final figures to both borrowed contracts, as rates and terms can vary significantly to the total amount to be repaid. If you're applying for a loan, you need to know exactly how much the interest rate is going to cost you, and there is no one better to give you that important information than the lender themselves. Not only will it save you from frustration, but you will also gain knowledge and understanding on what you are truly paying for. Your credit union can help you and your family apply for help with college expenses, often called financial aid. The loan part of financial aid usually defers, or holds off, on charging you interest until you graduate. That can be a big help if finances are tight. Auto loans Car loans require different paperwork than student loans. Before you even look for a car, talk with a loan officer at your credit union. Credit unions are in business to help you make the most of your money. A credit union doesn't have to pay stockholders and therefore can usually offer better loan interest rates. Your good credit history pays off! The more you save now, the less you borrow later! The bottom line For your first loan, learn as much as you can about what kinds of loans are available to you. Your credit union's web site can be a great resource for loan information. Then, call your credit union and make an appointment to talk with a loan officer. For a first loan, face-to-face is the best way to go about getting the money you want or need. The bottom line for taking out a loan is responsibility. Some 16-year-olds are more responsible with their financial accounts than people twice their age. When you borrow money, do it with the intent to repay the loan in a prompt and punctual manner. Borrowing money is a privilege, not a right. Once you earn that right, protect it by protecting your credit rating. Your credit history and a good credit report give you the ability to borrow in the future.
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