Basics of borrowing

Published 07-21-2021

When we were young, we used to think that we could buy anything we want once we reach a certain age and started working.. Sounds familiar, right? But then, reality hits – you’ve reached that certain age, already working, and you have the list of the things you want to buy, and yet, you feel that your earnings won’t be enough for those things. This is where borrowing money takes place.

People borrow money for different reasons: we need or want to buy something, we need some funds for emergencies like hospital bills and others, to pay bills and other reasons.
Debt is also a term for borrowing or owing money from people, group or an institution. But did you know that borrowing money isn’t just all about getting our desired amount and paying it back? It has important basic aspects that you should know beforehand.

First thing is, when borrowing money, you have to make sure that you understand these basic elements of borrowing.

You should start with the purpose. Why is there a need to borrow money? To purchase something? For additional cash or funds? Sometimes, you have to disclose to creditors what is the purpose of your loan – that is why you need to identify this right away.

When you already identified the purpose, you should also know the amount that you need to borrow.

However, the desired amount of your loan should still be subject to the approval of the creditor, and loan fees are, most of the time, being deducted from the loan amount.

The next thing that is very important to know when borrowing money is the amount of interest or the interest rate.

This is an additional amount from the total amount of money you borrowed. Creditors have different percentages of interest rates, you have to be fully aware of this before getting a loan.

Other basic elements are as follows:

Terms of payment – this refers to the length of time that you have in returning or paying the amount of money you borrowed. It could be for 12 months, 24 months, or 60 months depend ing on your loan type and amount. This will also affect the interest rate of your loan.

Collateral – some creditors and some types of loans require collaterals. This refers to an asset owned by the borrower which is accepted by the lender to secure the loan. Collateral is somehow considered as protection for the lender in case uncertainty happens like the borrower cannot pay for the loan. Collaterals must have a higher value than the loan amount.

Other fees – this pertains to fees related to the loan such as processing fee, application fee, penalty fee (if you fail to pay on time), and others depending on the lender

Repayment – this is the term to define your monthly amortization. You pay your lender regularly every month depending on your agreed terms of payment. According to an article in Philstar, to know if you will have good or bad debt, you have to answer the two basic questions:

Will the use of the debt proceeds improve my condition?

Are the terms and conditions of the debt fair?

You might want to know at this point how can you build good credit – that’s a good question! Here are the possible ways you can consider to start building a good credit score:
Apply for a credit card. This is one of the best ways to start building your good credit score. With this, you can practice purchasing items using a credit card and paying them on time. This will help you to be responsible for handling your finances. By having a credit card, approval of future credit or loans can be a lot easier and faster.
Avoid late payments. This should be your best practice – to be consistent in paying your monthly dues. Another way to get rid of late payments is paying your monthly dues earlier or twice per month. This shows that you are a responsible borrower.
Stay within your credit limit. Purchasing or maxing out your credit limit is such a bad habit and not a good sign for lenders. When you keep on doing this, this will make a negative impact on your credit score. Avoid applying for multiple credit cards or loans all at once. Multiple applications and refusals can make a not-so-good effect on your credit score for this will be seen as an unusual activity by the lenders. Before applying from one credit to another one, make sure you can pay.
If you think you have a good credit score at this point, make sure you maintain that. Another basic of borrowing is knowing which financial institutions can help you.

Here are some institutions that are monitored by the Bangko Sentral ng Pilipinas:

Universal and commercial banks – commercial banks are owned by private and offer basic services such as business, personal, and mortgage loans. Also, they accept deposits and allow the opening of savings and checking accounts. While Universal banks offer the same types of services as commercial banks, on top of being allowed to do other transactions like investing in equities and underwriting.
Thrift banking systems – this is where private development banks, stock savings, mortgage banks, loan savings, and microfinance thrift banks belong. These banks are a good option if you are borrowing money for short-term and long-term financing. They offer their services usually to agricultural and housing businesses and those who run small and medium enterprises.
Rural and cooperative banks – they operate in rural communities and provide people in the same area basic access to financial services. They assist farmers mostly.
Consumer finance companies – these are the alternative institutions that consumers can reach out for cash and product loans. They have fewer requirements and welcomes clients who are not traditionally entertained by banks because of their banking history.

These financial institutions can help you with the financial services you need and for loans, you will be needing. Aside from them, there are also government regulators that can help you know everything about credits, loans, and borrowing money.

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