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The Sandy Spring Way

Obtaining a Loan: Fundamentals of Borrowing

April 15th, 2013 | By Sandy Spring Bank

Obtaining Loans:

Information on Borrowing, Building Credit and Getting the Best Rates


Fundamentals of Borrowing

The sensible use of debt should be part of a sound financial strategy. Debt can enable you to enjoy things that otherwise are currently beyond your reach. Borrowing can also have downsides; for example, too much debt or the wrong kinds of debt can make life miserable. Developing good borrowing habits early can help you avoid a lot of anguish later.


The basics
Borrowing costs money, which means that when you pay it back, you have to pay more money than you were lent. The components of a good debt strategy are quite simple:

  • Make a careful decision about when and what to borrow
  • Find the best interest rate and terms, based on your needs and wants
  • Live up to your repayment responsibilities
  • Periodically review your debt – refinancing your mortgage or an auto loan may save you money


Prioritize borrowing based on long-term value

  1. College educations
  2. Housing
  3. True necessities
  4. Autos
  5. Major furniture purchases
  6. Vacations
  7. Expensive jewelry rarely worn


Develop a borrowing strategy

The wise use of credit can be an important part of your personal and business financial strategies. Follow these guidelines:

  • Use common sense – never borrow what you can’t repay.
  • Prioritize your borrowing based on long-term value.
  • Reserve some borrowing capacity for emergencies.
  • Consider all of the terms. Borrowing can be confusing, so be sure to review all of the terms and conditions before you sign any credit application.
  • Get help if you need it. If your borrowing gets out of control, take immediate steps to solve the problem. Contact lenders to work out a repayment plan. Stop using credit cards and do not open new ones. Seek the help of a qualified credit counselor.

Being conservative in your use of borrowing can help you take control of your financial future. Obtaining loans for the right reasons and living up to your repayment responsibilities can make borrowing a useful financial tool.


Building a Good Credit Record

Interest rates have fallen to record low levels – they may go lower or they may not. Accurate predictions of future interest rate movements are nearly impossible. To be eligible for current low rates, make sure you have great credit; a solid credit history can be one of your most useful and powerful financial assets. A record of prudent credit use and prompt payments could enable you to qualify for credit when you need it and get a lower interest rate on your borrowing.

There are three main credit agencies – Equifax, Experian, and TransUnion – that gather financial information on individuals and then make that information available to lenders to help them determine whether or not to give a loan to someone. The information they compile includes a great deal of basic data such as age, Social Security number, current and previous addresses, employers and marital status. They also obtain information on your borrowing history from places that have loaned you money such as credit cards issuers, mortgage lenders, etc. Your credit report probably includes all of the credit relationships you have, date established, maximum allowed credit, current balances and payment history.


Indications of a solid credit history:

  • Some, but not extensive borrowing
  • Prompt payment of monthly bills
  • Paying down balances over time
  • Steady employment


Items that can hurt your credit report:

  • Filing for bankruptcy
  • Too many credit cards
  • Too many applications for credit
  • Late payments
  • Increasing credit card balances
  • Several credit cards with balances close to the limits

Lenders will use a credit report, along with evaluating your capacity to repay, your character and any collateral in making decisions to lend you money. Many lenders also take these same issues into account in deciding what interest rate to charge or type of loan to offer.

It is important to make sure your credit report is accurate and up to date. A program enables you to receive a free credit report once a year; get this free report by visiting

www.annualcreditreport.com. You can also get copies of your report by calling TransUnion, Experian, and Equifax, but there may be a small charge unless you have recently been denied credit.

If you see an error on the report, be sure to contact the credit agency in writing. Explain the error and ask that it be corrected. Negative information generally remains on your credit report for seven years and bankruptcies may remain for 10 years; however, most lenders only pay particular attention to your activity within the past couple of years.

Be aware of your credit report – make sure it is accurate, work to improve your credit characteristics and understand the importance of your report to help ensure that credit will be there when you need it.


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