When money’s tight, a single unexpected expense has the power to twist your budget into knots. Your cash can’t stretch far enough to cover your usual bills and this new expense, so you rely on a loan or line of credit for help.
Borrowing money gives your budget a considerable boost in emergencies, but it introduces a new financial challenge later. Eventually, you’ll have to pay back what you borrowed. And when money’s tight, adding that extra bill to your budget can be tricky — but not impossible!
Don’t worry. This guide is here to help. Below you’ll find tips you can follow before and after you apply for a loan. They’ll help anyone borrow on a budget.
Understand Your Financial Profile
First of all, you need to understand a few things about yourself before you can borrow with intention. Namely, you need to recognize the type of borrower a future lender will see you as.
Are you someone who will pay back what you owe on time, or is there a chance you’ll struggle to hit due dates? Where you fall on this scale may impact how easily you qualify for loans and the price you pay.
While you might know yourself as a responsible borrower, lenders don’t know you on the same level. They have to make this assessment by looking at your finances — from your employment history and pay schedule to your credit score.
Your credit score is the numerical value representing your previous borrowing track record. It’s a three-digit number that falls on a scale of 300 and 900, with 900 being the best score you can achieve.
Once you know how your score is calculated, you can understand why you have a good or bad score. And more importantly, you can understand how you might improve a bad score before you borrow.
If you don’t have time to beef up your credit score before you borrow, knowing your number can help you identify lenders that cater to your financial profile. This step can save you time and heartache as you don’t accidentally apply for things for which you don’t qualify.
Comparison Shop Lenders and Loans
Once you have a broad idea of the types of loans you can qualify for, it’s time to hunt down concrete borrowing options. Open your favourite Internet search engine and begin your research.
While it might be tempting to apply with the first lender that comes up in the results, you should investigate at least five other lenders.
Comparison shopping in this way can give you a better idea of what kinds of loans you can borrow. After all, you have more than an installment loan to borrow. You can also take out cash advances, lines of credit, and secured loans to help with your emergency.
Comparison shopping can also help you understand the cost of borrowing for you. Including several lenders in your initial research stage gives you the opportunity to cherry-pick the option with the lowest APR and most favourable terms.
Compare the Cost of Borrowing to Your Budget
Now you know how much borrowing will cost, drop those numbers into your budget. Pretend you’ve already accepted your loan and see how its payments affect your overall cash flow.
Don’t be alarmed if your loan doesn’t neatly fit into your budget on the first go around. Not everyone can afford to add a new bill without tweaking their current spending habits. You might have to limit how much non-essential spending you make during the lifespan of your loan to be able to afford it.
Pro tip: to find extra room in your budget, look at the past three months of spending. This retrospective look helps you identify spending habits that tie up your cash — from the obvious monthly subscription services to the less noticeable things, like infrequent parking fines, toiletries, and household items.
What if you free up more cash than you need for your monthly payments? Check your lender’s policy on extra or pre-payments. Some lenders may let you pay as much and as early as you want, while others only want you to cover your scheduled payments.
Depending on your lender’s policy, paying more each time may reduce how much interest you accrue — not to mention, you’ll free up your budget faster.
On the flip side, if you still can’t afford your prospective loan’s payments, even after you limit your non-discretionary spending, this is a sign it’s not the right borrowing option for you.
Go back to the previous stage and keep looking. You might have to broaden your search to include alternatives like credit cards, cash advances, or loans given by friends and family.
Stick with Your New Budget
Once you successfully apply for your line of credit or loan, stick to your new spending plan. Reduce what you spend on the non-essentials so that you can afford to pay each payment on time, without fail.
Check with your lender to see if you can set up automatic withdrawals from your bank account. Automatic withdrawals give your lender permission to take their payment from your bank account on schedule. Automating your finances this way means you won’t have to remember to move money manually by a specific date.
Borrowing on a budget is more challenging, but it’s still possible. You just have to borrow carefully, making sure to do your due diligence when comparison shopping and budgeting. These tips will help you find a loan or line of credit you can afford once repayment kicks in.