The Basics of Credit - What to Know Before You Take Out a Credit Union Loan
People borrow money from their credit union for a variety of reasons. Taking out a credit union loan is an easy way to fund purchases you could not afford otherwise. However, it’s important to understand the basics of credit before you go into debt.
Is Borrowing Right for You?
Here are five questions you should ask yourself before taking out a loan:
- Is the purchase necessary right now?
- Can I find an alternative item that’s less expensive?
- Do I earn enough to keep up on the payments?
- What’s the soonest I can realistically pay off the loan?
- What happens if I can’t pay?
Before signing on the dotted line, make sure the amount you’re borrowing fits into your current budget and won’t adversely affect your future finances.
The Basics of Credit
There are four types of credit, each with their own terms:
- Secured closed-end for things like cars, homes and boats where the item is held as collateral.
- Secured open-end, such as home equity lines of credit.
- Unsecured closed-end are typically used for consolidating existing debt.
- Unsecured open-end like credit cards that, used judiciously, help build your credit worthiness and help you qualify for larger, secured loans.
No matter which type of loan you choose, it’s important to fully understand the terms before you sign.
Is a Credit Union Loan Right for You?
Here’s how most loans work:
- The costs. You want to minimize them as much as possible, but there are many ways of amortizing a loan. A loan amortization calculator can help you see how different interest rates and transaction fees will affect your total expense.
- Paying down debt. Most loans are gradually paid off over time with each payment going toward the original balance and the interest cost. The length of time you have to pay, or the loan term, affects the size and amount of your payments. If you pay more than what is due each month you can often significantly reduce the amount of interest you pay.
- Qualifying. Typically, lenders only make loans they believe will be repaid as agreed. If you have poor credit or a limited borrowing history, you may need a co-signor, especially for larger loans.
If you do decide to borrow, a credit union can be your best source of funding. To learn more about how a credit union loan works, contact us today to discuss all your lending needs by calling 702-228-2228.