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Money doesn’t grow on trees, unfortunately, and sometimes you need to borrow money on the fly for a cash injection. Even before the pandemic, Americans borrowed money to bridge the gap between paychecks, cover unexpected expenses, or finance larger purchases like home improvement projects or cars.
A recent Forbes Advisor survey found that many Americans who borrowed money experienced more long-term financial benefits. In the survey, 69% of those who borrowed money in the past said it improved their financial situation, compared to 6% who said it made their situation worse. Those whose finances benefited from borrowing likely followed responsible practices to avoid the pitfalls.
Borrow money in America
Only a small percentage of Americans prefer not to borrow or have never borrowed money. Of these, 8% prefer to use their personal savings while 19% have never borrowed money. Among Americans who are open to borrowing money, personal loans and credit cards are the most common methods.
It is much easier to avoid financial pitfalls if you use personal savings or an emergency fund and therefore avoid borrowing money altogether. But for some, borrowing money is a necessity, especially for unexpected expenses. Whether you’re borrowing money through a loan, credit card, line of credit, or from friends and family, making sure you can afford it is essential. monthly payment obligation. This will help you leverage the money more efficiently and keep your finances in shape throughout the process.
One way to lower your monthly payment is to lower interest rates. Since your credit score is a key factor in determining your interest rate, it is in your best interest to improve your credit score before borrowing money. The lowest interest rates are generally reserved for those with good to excellent credit (a FICO score of at least 670). Less than half of Americans fall within this range.
Not only is improving your chances of receiving a lower interest rate a convenient way to avoid financial pitfalls, but Americans say the lowest rates and fees are most important when looking to To borrow money. Next in second and third place are high loan amounts and long repayment terms, respectively.
Borrow money Improved financial situation
Borrowing money does not always have a negative impact on your financial situation. In fact, 69% of Americans said that borrowing money improved their financial situation.
Although more than half of Americans said their financial situation improved by borrowing money, 6% of Americans said their situation got worse. Financial situations usually worsen due to unforeseen difficulties or by not following responsible debt practices. To avoid financial pitfalls when borrowing money, we recommend:
- Pay your bills on time or early to avoid hurting your credit score
- Borrow below your means and within your budget
- Take the time to find the lowest rates and fees to reduce overall borrowing costs
- Improve your credit score or apply with a co-signer to increase your chances of receiving the most favorable terms
- Don’t overspend if you’re using a credit card or line of credit
- Set up automatic payments so you never miss a payment
- Monitor your monthly statements
- Consolidate high-interest debt into one simplified payment
These responsible practices are essential for both current borrowers and the 73% of Americans who plan to borrow money in 2022.
Whether you plan to borrow money in 2022 or not, you might have the same concerns as other Americans. The most common borrowing concerns are creating additional debt (30%), interest charges (36%) and the negative impact it can have on credit (22%).
If you are preparing to borrow money or plan to do so in the future, follow these general tips to help you resolve each of the concerns above:
- Only borrow what you know you can afford to repay. Before borrowing money, analyze your budget and estimate your possible monthly payments. We recommend that you only borrow money that you know you can afford to repay in a timely manner to avoid creating more debt that you cannot repay.
- Improve your credit score before applying. Because your credit score is a key factor that determines your interest rate on loans, it’s crucial to improve your credit score, if necessary, before you apply. A score of at least 670 will improve your chances of receiving lower interest rates; however, a score of at least 720 can help you get the lowest fares possible.
- Consider low interest personal loans. Improving your credit score isn’t the only way to lower interest charges. You can also consider low interest personal loans. While some providers offer rates as low as 3%, the lower rates are reserved for highly qualified potential borrowers.
- Pay on time or in advance. Although applying for a loan or credit card may have a temporary negative impact on your credit due to a rigorous credit check, you can improve your credit by paying on time or early. Your payment history is one of the most important factors in your credit score and represents 35% of your FICO score. Perfecting your payment history has a positive impact on your credit.
- Look for customer reviews. Before borrowing money, research your preferred lender or bank on review sites like Trustpilot and the Better Business Bureau (BBB). This is where you can find red flags and read customer reviews to help you spot and avoid potential scams.
Personal Loans Among Popular Borrowing Methods
Twenty-six percent of Americans prefer to use personal loans when borrowing money, making it the most popular method of borrowing above credit cards, home equity loans or home equity lines. credit, friends or family and personal savings. Moreover, only 20% of Americans are unaware that they can use personal loans to borrow money.
Related: Best Personal Loans
Even though 80% of Americans are aware of personal loans, that doesn’t mean they’ve used them as a borrowing option. In fact, 60% of Americans said they borrowed money through a personal loan. The remaining 40% borrowed by some other method or did not borrow money.
If you are considering taking out a personal loan, we recommend finding lenders who offer a pre-qualification process; it pays to prequalify with multiple personal loan providers. Prequalification only requires a soft credit check, which has no impact on your credit score, and allows you to see what terms you might qualify for when you apply. This process allows you to compare personal loans and find the best deal available for your specific needs.
Prequalifying with multiple lenders, as 67% of Americans have done, could be the difference between a loan that improves or worsens your finances.
This online survey of 2,000 US adults was commissioned by Forbes Advisor and conducted by market research firm OnePoll in accordance with the Market Research Society’s Code of Conduct. Data was collected between March 23-24, 2022. Margin of error is +/- 2.2 points with 95% confidence. This survey was overseen by the OnePoll research team, a member of the MRS and a member of the American Association for Public Opinion Research (AAPOR). For full survey methodology, including geographic and demographic sample sizes, contact email@example.com.
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