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Deciding when to take out your first loan is an important decision. How can you tell you're ready for a loan?

"I won't buy a car until I can pay for it with cash," says Jess. She's 18 so she can legally sign for a loan now. But Jess doesn't want to be stuck with monthly payments while she's in school.

That means she won't be buying a brand new car. In fact, she might not buy a car at all, but take the bus instead. She's still thinking about it.

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.

"Congratulations...!"

...You qualify for a $5,000 loan immediately. Just fill in the enclosed card by…

Wait! Proceed with caution!

True, you need to qualify, but that's just a basic step. It must not take much to qualify if they can't even spell your name right on the envelope!

When you dispose of those offers, protect your identity.

Lots of offers congratulating you on qualifying will come into your mailbox—online and onland. They're not all 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.

It's a big deal to be a co-signer.

Happy Birthday!

Age is important. You must be 18 or older to be legally liable for signing a contract. "Legally liable" means that legal action can be taken against you if you fail to follow through on your promises.

What about if you are under 18?

Ask your credit union if they will allow you to borrow money with a co-signer.

What's a Co-signer?

A  co-signer is someone who is 18 or older, who is qualified to sign the loan agreement.

Whoever co-signs for you agrees to repay the loan if you don't.

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Not many financial institutions will allow someone under age 18 to take out a loan. Ask anyway—they may have some other, better ideas to help you get the money you need!

How much do you make?

Don't let yourself get into this position!

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.

For example, are you moving from your parents' home into an apartment? You'll discover you're paying more than just the rent! Unless you plan to give up food, toilet paper or television.

Are you graduating from college or getting married? How will your loan payments affect these decisions?

Use this readiness checklist to help you decide if you're ready to borrow money.

Readiness Checklist

Start by ask yourself these questions:

Do I earn enough income to make loan payments?	yes	no
Will I have trouble paying my other expenses on top of the loan payments?	yes	no
Will I be able to maintain my current lifestyle and still make loan payments?	yes	no

If your answers are no," regardless of your age, don't borrow the money. If your answers are yes, ask yourself more questions:

Do I really need the item I'm borrowing the money for?	yes	no
During the course of the loan, is there any chance my income may decline?	yes	no
During the course of the loan, will my expenses increase?	yes	no

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Jess won't take out any loans because she doesn't need to, and doesn't want to.

She doesn't want to build a bad credit history before she has her college degree.

How do I get approval?

Your credit union will approve your loan based on what is commonly known as the four "Cs" of credit. They are:

Your credit union will approve your loan based on your credit worthiness

• 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?

Credit unions, and all legal lenders, must follow strict lending laws that regulate the process. One thing they have to do is set conditions for determining whether or not a loan is approved. They can't base their decisions on other factors. New laws protect you

New Laws to Protect You

In 2009, President Obama signed into law the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act in an effort to help credit card consumers avoid getting trapped with debt. This bill even takes teenagers into special consideration.

The easy access to credit cards teenagers once had is now limited. No one younger than the age of 21 is allowed to get a credit card unless they show proof of income or have a co-signer.

Also, the new law does not allow credit card companies to give out promotional items, such as t-shirts or pizza coupons, to attract students. Credit card companies will not be allowed to promote their products within 1,000 feet of college campuses.

All of this is an effort to stop you from becoming just another consumer with a bad credit score!
Some of the CARD Act changes affect monthly statements, which now must be billed to you 21 days before the payment is due. Credit card companies must also notify you 45 day before any interest rate increases.

If you don't want to continue with your credit card because of the increase in interest rates, you have the right to cancel your card and pay off the existing balance with the original interest rate. The law also prohibits double-cycle billing and using the terms "fixed rate" and "prime rate" in a misleading manner.

For more information about the CARD Act, go to the Whitehouse.Close

Think about it—would you want your loan request to be determined by how you dress, your jewelry, if you're female or male, which church you go to, or where you live?

Fortunately, the government makes sure that this information isn't a factor.

What if you've decided you're ready to take out a loan?

Once you've decided

There are loans out there for just about anything you need.

The most popular loans for high-school students are student loans for college, and smaller loans for cars.

Student loans

You can take out a student loan in either your name or your parent's name. The person in whose name the loan is taken out is usually responsible for paying it back.

What about signing all those forms?

What About Signing All Those Forms?

When you reach age 18, you can legally sign contracts.

Just because you can sign doesn't mean it's a good idea to jump on it! Signing a contract to borrow money can have far-reaching effects. Now's the time to learn to:

• Never enter into a contract casually;
• Always read the terms and conditions under which you are agreeing to pay the money back.

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Your credit union can help you and your family apply for help with college expenses, often called financial aid.

The loan part of financial aid usually defers, or holds off, on charging you interest until you graduate. That can be a big help if finances are tight.

Auto loans

Car loans require different paperwork than student loans. Before you even look for a car, talk with a loan officer at your credit union.

Credit unions are in business to help you make the most of your money—and consumers agree they like credit unions more than banks! A credit union doesn't have to pay stockholders and therefore can usually offer better loan interest rates.

The more you save now, the less you borrow later!

The bottom line

For your first loan, learn as much as you can about what kinds of loans are available to you. Your credit union's web site can be a great resource for loan information.

Then, 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.

The bottom line for taking out a loan is responsibility. Some 16-year-olds are more responsible with their financial accounts than people twice their age.

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.

Once you earn that right, protect it by protecting your credit rating. Your credit history and a good credit report give you the ability to borrow in the future.