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Money doesn’t grow on trees, unfortunately, and sometimes you need to borrow money in a pinch for a cash infusion. Even pre-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 financial benefits in the long run. In the survey, 69% of those who have borrowed money in the past said it made their financial situation better compared to 6% who said it made their situation worse. Those finances benefited from borrowing money likely followed responsible practices to avoid pitfalls.
Borrowing Money in America
Only a small percentage of Americans prefer to not borrow or have never borrowed money. Of those, 8% prefer to use 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’s much easier to financial pitfalls if you use personal savings or an emergency fund, and, therefore, avoid borrowing avoiding money altogether. But for some, borrowing money is a necessity, especially for unexpected expenses. Whether you borrow money through a loan, credit card, line of credit, or friends and family, it’s essential to ensure you can afford the monthly payment obligations. Doing so will help you leverage the money more effectively and keep your finances in shape throughout the process.
One way to decrease your monthly payment is through lower interest rates. Because your credit score is a key factor in determining your interest rate, it’s in your best interest to improve your credit score before borrowing money. The lowest interest rates are typically reserved for those with good to excellent credit (a FICO score of at least 670). Less than half of Americans fall into this range.
Not only is improving your odds of receiving a lower interest rate a handy way to avoid financial pitfalls, but Americans say that the lowest rates and fees are most important when looking to borrow money. Coming in a close second and third are high loan amounts and long repayment terms, respectively.
Borrowing Money Improved Financial Situations
Borrowing money doesn’t always have a negative impact on your financial situation. In fact, 69% of Americans said borrowing money made their financial situation better.
Although more than half of Americans said their financial situations improved from borrowing money, 6% of Americans said their poor situationed. Financial situations typically worsen due to an unexpected hardship or by not following responsible debt practices. To avoid financial pitfalls when borrowing money, we recommend you:
- 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 to never miss a payment
- Monitor your monthly statements
- Consolidate high-interest debts into one streamlined payment
These responsible practices are key for both current borrowers and the 73% of Americans who plan to borrow money in 2022.
Whether you plan on borrowing money in 2022 or not, you may have similar concerns as other Americans. The most common borrowing concerns are creating more debt (30%), interest costs (36%) and the negative impact it may have on credit (22%).
If you are preparing to borrow money or anticipate you will sometime in the future, follow these general tips to help navigate each of the above concerns:
- Only borrow what you know you can afford to repay. Before borrowing money, analyze your budget and estimate your potential monthly payments. We recommend only borrowing money that you know you can afford to repay in a timely manner to avoid creating more debt for yourself that you’re unable to 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 secure the lowest rates possible.
- Consider low-interest personal loans. Improving your credit score isn’t the only way to reduce interest costs. You can also consider low-interest personal loans. While some providers offer rates as low as 3%, the lowest rates are reserved for highly qualified prospective borrowers.
- Pay on time or early. Although applying for a loan or credit card may have a temporary negative impact on your credit due to a hard credit check, you can help your credit by paying on time or early. Your payment history is one of the most important factors of your credit score and makes up 35% of your FICO score. Perfecting your payment history has a positive impact on your credit.
- Research customer reviews. Before borrowing money, look up your preferred lender or bank on review sites like Trustpilot and the Better Business Bureau (BBB). This is where you can find any red flags and read customer reviews to help spot and avoid any potential scams.
Personal Loans Among Popular Borrowing Methods
Twenty-six percent of Americans prefer using personal loans when borrowing money, making it the most popular borrowing method above credit cards, home equity loans or lines of credit, friend or family, and personal savings. What’s more, 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 utilized them as a borrowing option. In fact, 60% of Americans said they have borrowed money through a personal loan. The other 40% have either borrowed through another method or haven’t borrowed money.
If you are considering taking out a personal loan, we recommend finding lenders that offer a prequalification process; It’s beneficial to prequalify with multiple personal loan providers. Prequalifying only requires a soft credit check, which has no impact on your credit score, and lets you see what terms you may qualify for when you apply. This process lets you compare personal loans and find the best offer available for your specific needs.
Prequalifying with multiple lenders, like 67% of Americans have done, could be the difference between a loan that improves or poors your finances.
This online survey of 2,000 US adults was commissioned by Forbes Advisor and conducted by market research company OnePoll, in accordance with the Market Research Society’s code of conduct. Data was collected between March 23 and 24, 2022. The margin of error is +/- 2.2 points with 95% confidence. This survey was overseen by the OnePoll research team, which is a member of the MRS and has corporate membership with the American Association for Public Opinion Research (AAPOR). For a complete survey methodology, including geographic and demographic sample sizes, contact firstname.lastname@example.org.
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