Fundamentals of borrowing

The sensible use of debt should be part of a sound financial strategy. Debt can enable you to enjoy things that otherwise are currently beyond your reach. Borrowing can also have an ugly side. Too much, too expensive or the wrong kinds of debt can make life miserable. Developing good borrowing habits early can help you avoid a lot of anguish later.

The basics

Borrowing costs money. That is not necessarily bad. It just means that when you pay it back, you have to pay more than you borrowed. The components of a good debt strategy are quite simple:

  • Choose when to borrow and what to borrow for carefully. Borrowing for things that provide long-term value should come before borrowing for things that provide only momentary or limited enjoyment.
  • Live up to your repayment responsibilities. Be sure you can afford the payments that the borrowing will require.
  • Periodically review your debt. Refinancing your mortgage or an auto loan may save you money.

The importance of a good credit record

Most lenders will automatically order a credit report when you request a loan, so having a good credit record is important and does more than just make approval easier to get. Many lenders use your credit record to determine credit limits and what rates to charge. A good credit record can save you money.
It is important to make sure your credit report is accurate and up to date. You can request a free copy of your credit report each year at You can also get copies by calling the credit agencies, but there may be a small charge unless you have recently been denied credit.

The loan application

Before sitting down to fill out a loan application or arranging a meeting with a loan or mortgage officer, here are some items you may want to have handy:
  • Proof of income: Depending on the type of loan, you may need to provide a copy of a recent payroll check stub or a W-2 statement from the prior year.
  • Tax return: If you are applying for a mortgage or a large personal loan, you will probably need to supply copies of at least one federal tax return.
  • Personal financial statement: For mortgages and other large loans, lenders may require that you supply a financial statement listing all your assets and liabilities. It is also a good idea to prepare a personal financial statement annually as part of managing your finances.

What lenders are looking for

Remember that lenders are loaning you money that they want repaid along with interest. This is their business and they want to make sure that you will be able to live up to your repayment responsibilities. Along with the items mentioned above, they will be looking at:
  • Your employment record: Having a steady job can help give lenders confidence that you will have an ongoing income to repay your loan. If you have a history of several job changes, it may raise a flag so be sure you can explain them. For example, if you have frequently changed jobs for better opportunities, be sure to mention it.
  • Stable residence: Lenders like to see longevity of residence at the same place.
  • Responsible handling of other debts: Having a solid history of timely and regular payments on other borrowing also helps give lenders confidence that you will be able to handle this debt in the same manner.
  • Debt to income ratio: Lenders also look at your income relative to amount of debt you have and may be about to take on.
  • Assets: Your asset levels can also provide lenders with confidence that you will be able to repay your loan.

Common sense borrowing habits

  • Never borrow what you cannot repay.
  • Never borrow for a luxury if you cannot afford the necessities.
  • Prioritize your borrowing.
  • Reserve some borrowing capacity for emergencies.

Getting help if needed

Take action immediately if your borrowing is getting out of control. If credit cards are the problem, stop using them or even cut them up. Contact lenders to develop a workable repayment plan.
Get professional help if you need it. Many non-profit organizations exist that help individuals when all else fails, but be very wary of organizations that offer to fix your credit rating or want you to pay a fee to get you out of debt easily.

Consider all the terms on all your borrowing

Comparing credit cards can be confusing. You have to consider interest rates, fees and associated benefits. The right card for you should reflect how you use it. If you pay the full balance monthly, the interest rate is of little concern and you can focus on any annual fee and benefits such as airline miles or cash back features. If you carry over balances, the interest rate should be a top concern.
The right mortgage for you should balance interest rate, length, and down payment requirements that fit your situation. Adjustable rate mortgages usually have lower rates, but your payments may rise if interest rates rise. Long-term mortgages usually lock in a higher rate. If you expect to stay in your current home only a few years, an adjustable rate mortgage may be best. If an increase in monthly payments would be too painful, look at a fixed rate mortgage or an adjustable one with rate adjustment limits.


The decision to borrow money is serious and you should thoroughly understand your side of the transaction. Spending a little time to think about borrowing and being properly prepared will make the process easier and may improve your chances of getting the loan approved.
Being conservative in your use of borrowing can help you take control of your financial future. Borrowing for the right reasons and living up to your repayment responsibilities can make borrowing a useful financial tool.

We can help

If you have questions about borrowing or would like help developing your financial strategy, visit one of our branches or all us at 1-800-288-3425.