Deciding when to take out your first loan is an important decision. How can you tell you're ready for a loan?
Is it when:
- You get a fantastic credit card offer in the mail?
- You just had your 18th birthday?
- You just got a job?
The answer isn't as simple as you think.
...You qualify for a $5,000 loan immediately. Just fill in the enclosed card by…
Wait! Proceed with caution!
Offers congratulating you on qualifying for a loan will start to fill up your email inbox and your mailbox. They're often not in your best interest.
Start with your credit union. You already have your accounts there, have a history based on those accounts, and they have the authority to approve or deny your loan application.
Age is important. You must be 18 or older to be legally liable for signing a contract. What if you are not 18 yet?You can ask your credit union if they will allow you to borrow money with a co-signer.
Not many financial institutions will allow you to take out a loan before age 18. Ask anyway—they may have some other, better ideas to help you get the money you need.
How much do you make?
Many people have problems repaying first loans. Not having enough income to handle the payments is the first reason. Failing to account for rising expenses is another.
Look critically at your expenses over the time you plan to borrow the money.
- Do I earn enough income to make loan payments?
- Will I have trouble paying my other expenses on top of the loan payments?
- Will I be able to maintain my current lifestyle and still make loan payments?
If your answers are no, regardless of your age, don't borrow the money. If your answers are yes, ask yoursel more questions:
- Do I really need the item I'm borrowing money for?
- During the course of the loan, is there any chance my income will decline?
- During the course of the loan, will my expenses increase?
How do you get approval?
Your credit union will approve your loan based on what is commonly known as the four "Cs" of credit. They are:
Character—your willingness to repay. Determined from your reputation and your credit history: Do you pay your bills on time? Have you used credit before?
Capacity—your ability to repay. Determined by looking at your employment and debt history. Do you have a job? Do you have other debts?
Collateral—what you'll give up if you don't repay the loan. Based on something of value you agree to forfeit if you default on your loan. It can be a car, a savings account, or a certificate of deposit (CD).
Capital—Your assets, or valuable items you own free and clear. What are you worth? Do you have other assets, such as a savings account, car, or CD that could be used to repay the debt?
The bottom line
For your first loan, learn as much as you can about what kinds of loans are available to you. The most popular loans for high-school students are student loans for college, and smaller loans for cars. Your credit union's web site can be a great resource for loan information.
Call your credit union and make an appointment to talk with a loan officer. For a first loan, face-to-face is the best way to go about getting the money you want or need.
When you borrow money, do it with the intent to repay the loan in a prompt and punctual manner. Borrowing money is a privilege, not a right.