What to know before you borrow

You may consider borrowing money for a specific need to make life better today, to address a particular expense or to invest in the future; mainly with some long-term goals in mind. Of course, any money borrowed will have to be paid back, which is where things like interest rates and loan terms come into play.

To get started, we’ll take you through some important things to consider before taking that loan:

The interest

Because they’re taking a risk by loaning money, lenders charge a fee, known as interest, that the borrower must pay back along with the original borrowed amount.

Let’s say you want to borrow AED 1,000 and a lender offers an annual interest rate of 3%. At the end of the year, you will owe AED 1,030 (AED 1,000 + AED 30 for interest) to pay back the loan.

What to know before you borrow

It’s important to pay attention to the interest rate, since lenders charge different interest rates based on the type of loan and how qualified you are to borrow money.

Borrow Wisely – Stay Informed

Debt is money owed to someone else (like a bank). Whether you use a credit card or take out a loan, you need to be aware that debt will rapidly increase if you don’t pay what is owed on time, because interest can accumulate and grow quickly. The good news is that you can easily avoid getting buried under a mountain of debt by:

  • Being disciplined with monthly budgeting
  • Tracking daily spending habits
  • Sticking to a budgeting routine such as the 50-30-20 rule (50% allocated for needs, 30% allocated for wants and 20% allocated for savings/paying off debt)
  • Paying off credit card balances in full every month
  • Only borrowing what is needed
  • Building an emergency fund

Keep an eye out

When it comes to loans, credit cards, or any other debts, make sure you keep an eye out for these:

  • Terms and conditions: Always study the terms and conditions with a fine-tooth comb and look out for hidden charges and fees. Be on alert for any changes in the terms and conditions. Yes, these can be boring to read, but it’s important to understand all T&Cs before taking on new debt, so you know what you’re getting into.
  • Fees and charges: Some credit cards have annual fees, and some loans have origination fees – an upfront fee for processing a loan. Before borrowing money make sure to understand all potential charges. These can be found in the terms and conditions.
  • Interest rates: Always be aware of the interest rate associated with a credit card or loan. A lower interest rate is of course preferable, but it’s not the only thing to consider.
  • Credit shield insurance: Make sure to check if the lender offers credit shield insurance. For an additional fee, credit shield insurance protects a credit card in the event of unforeseen circumstances. For example, if you lose your job or get sick, this insurance can help cover some monthly payments until you get back on your feet.
  • Credit score: A credit report shows lenders your credit and repayment history. So a credit score represents your “creditworthiness”. It is essentially a number based on the credit report, which is usually analysed and sourced from credit bureaus. A higher credit score indicates you may be more likely to pay back a loan and is viewed more favourably by financial institutions. A lower score, on the other hand, will be evaluated by lenders and may be seen as a greater risk. To make sure your credit score remains healthy, you must make any loan or credit card payments on time.

To sum it up

Now that you know the basics of borrowing, you can decide whether a credit card or loan is best, or if you should borrow money at all.

Whichever one you choose, remember that living within your means and prioritizing savings is the first step to financial security and building wealth.

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Learn about Borrowing