How do loans work? Well, the terms of a loan are agreed to by each party in the transaction before any money or property changes are disbursed. If the lender requires collateral, this requirement will be outlined in the loan documents. Most loans also have provisions regarding the maximum amount of interest, as well as other covenants such as the length of time before repayment is required.
The loaning industry is based upon the principle of integrity. If you find yourself in the situation where you have loaned money, you should be able to follow the guidelines below to become a responsible borrower:
Build a solid foundation
Establishing rapport is essential in any relationship, including a loaning relationship. By networking and establishing a good working relationship with your vendors allow you to build your loaning credibility. You may even be able to avoid taking out loans entirely if you can secure better terms and negotiate repayment with each vendor.
Use a Loan Calculator
Being financially-savvy will also help you understand how much money you need, including your paying capacity, as well as the term or duration of your loan amount. Loan calculators can help you out so you will be aware of what amount of money can you borrow and pay based on your financial plan.
Know your debt-to-income ratio
Your debt-to-income ratio is a comparison of your annual profit to your annual debt. You are in good shape if your ratio is 1.0 or greater. This means that the better the ratio, the higher the chances of qualifying for a loan. The debt-to-income ratio is also a good indicator that if anything below 1.0 means that you are spreading your income too thin and that you should reconsider taking any additional debts.
Use a Financial Cushion
Before you take a loan, make sure that you have at least six (6) months’ worth of savings so that if anything goes financially wrong, you still have the capability to pay for your debts.
Draft (and stick) to your financial plan
Making a financial plan to make sure that your income is allotted to the correct priorities (including paying your debts) is one of the most salient qualities of being a good borrower. One money management trick is the jar model which can help you manage your expenses.
Borrow only when you need to
As much as possible, only borrow money when you are in a dire situation. Having no loans is better than being swamped in debt. You have to understand that sometimes, loans are not the best answer to your financial problems. You can check other solutions such as increasing your profit margin or reducing your expenditures.
Pay on time
Open and honest communication is key to being a good borrower. Make sure that you pay your debts on a timely manner and as scheduled. If for some reason, you cannot pay on time, be honest and call your lender.
In summary, being a responsible borrower ensures you to build your credibility not just in the financial aspect but by being a person with integrity. The bottom line is to only borrow within your paying capacity and be timely in paying your debt.