Borrowing money can be both a helpful tool and a potential risk. On one hand, having access to credit provides a vital safety net in times of emergency or allows you to finance major purchases—like a home or vehicle—that can improve your quality of life. On the other, excessive or poorly managed debt can become a serious obstacle to long-term financial stability. Asking the right questions before taking on debt is key to making smart decisions that support your financial health. Here’s a detailed look at twelve questions you should consider whenever you’re faced with borrowing money.

1. Why Do You Want to Take on Debt?

Before signing on for any loan, take a moment to assess your motivation. Are you borrowing to cover an unexpected emergency—such as a car repair or medical bill—or to finance a major investment like education, a home, or consolidating existing debt? Clearly defining your need, the loan duration, and how you plan to use the funds will help you determine whether taking on this debt makes sense for your financial situation.

2. What Kind of Equity or Collateral Do You Have Available?

Lenders often require security to reduce their risk, so understanding your available collateral is crucial. Collateral can be any asset you fully own that can back up the loan. For example, when you secure a mortgage, your home is used as collateral. Similarly, a car loan is typically backed by the vehicle itself. If you don’t have fully owned assets, you might be asked to secure the loan with whatever equity you have—for instance, the value of your home minus any outstanding mortgage. In cases where no collateral is offered, the debt is considered unsecured, which might result in higher interest rates.

3. What Kind of Debt Best Meets Your Needs?

Not all loans are created equal. Personal debt generally falls into several categories: • Revolving Debt: Credit cards or lines of credit that let you borrow repeatedly up to a set limit, with variable payment amounts. • Secured Debt: Loans that require collateral, such as auto or mortgage loans, where the asset guarantees repayment. • Unsecured Debt: Loans offered based on your creditworthiness without collateral, like many personal loans or credit card balances. By understanding these differences, you can choose a debt product that aligns with your goals and financial circumstances.

4. What Is the Total Cost of the Loan, Including Interest?

When you borrow money, you’re not only responsible for repaying the principal but also for the associated costs. The total cost of a loan encompasses the interest rate plus any additional fees—such as origination fees, closing costs, or prepayment penalties. The annual percentage rate (APR) combines these elements, giving you a clear picture of what you’ll actually pay over the life of the loan. Knowing the full cost upfront helps you budget more accurately and compare loan offers.

5. How Much Will the Interest Be, and Will It Stay the Same or Change?

Understanding the interest rate is essential to evaluating a loan’s affordability. Fixed-rate loans offer predictable payments because the interest rate remains unchanged for the duration of the loan. In contrast, variable-rate loans fluctuate with market conditions, which can result in lower rates when the market is favorable—but also higher costs if rates increase. Consider your tolerance for risk and your ability to handle changes in your monthly payment before choosing a variable-rate option.

6. Can You Afford the Monthly Payments?

Perhaps the most critical question of all is whether the monthly payments fit within your budget. Start by listing all your current expenses and income to see how much money remains for additional debt service. A helpful guideline is to ensure that your total debt obligations do not exceed roughly 50% of your annual income. If the numbers don’t add up, you may need to reconsider taking on the new loan or adjust the loan amount.

7. How Long Will It Take You to Pay Off the Loan?

The repayment period affects both the monthly payment amount and the total interest you’ll pay over time. A longer loan term may ease the monthly burden but often results in paying significantly more interest. Conversely, a shorter term increases monthly payments but minimizes interest costs. Using an online loan calculator can help you visualize different scenarios and choose a repayment plan that balances affordability with overall cost savings.

8. Are There Any Penalties for Early Repayment?

Some lenders charge fees if you pay off your loan before the scheduled end date, which can diminish the financial benefit of paying down debt early. It’s important to review the loan terms carefully to understand if early repayment penalties apply. This knowledge allows you to plan whether it’s advantageous to pay off the debt faster or if you should stick to the original schedule.

9. What Are the Tax Implications of Borrowing Money?

Although loans are generally not counted as taxable income, complications can arise if a debt is forgiven or if you fail to repay as agreed. For instance, if part of your debt is canceled, the IRS might treat the forgiven amount as taxable income. Additionally, certain loans might offer tax benefits—for example, mortgage interest can be tax-deductible. Consulting with a tax professional can help you understand how borrowing might affect your overall tax situation.

10. Where Will You Borrow Money?

The source of your loan matters. Options include banks, online lenders, and credit unions. Each type of institution offers different terms, interest rates, and customer service experiences. Credit unions, for instance, are member-owned and often provide more personalized service with competitive rates. Comparing offers from multiple lenders will help you identify the option that best suits your needs.

11. How Reputable Is the Lender?

Reputation and trustworthiness are key factors when choosing a lender. Predatory lending practices—such as extremely high interest rates, excessive fees, or misleading terms—can trap borrowers in a cycle of debt. Research reviews, seek recommendations, and verify that the lender is properly regulated. Choosing a reputable institution ensures that you’re working with professionals who prioritize ethical practices and fair treatment.

12. What Kind of Benefits Does the Lender Offer Its Borrowers?

Finally, consider the additional benefits a lender may offer. Beyond competitive rates and fair terms, some lenders provide digital tools, financial assistance programs, or options to defer payments in challenging times. Robust financial education resources and personalized customer service can also be valuable, giving you the support you need to manage your debt successfully over the long term.

Why It’s Important to Ask the Right Questions

Understanding the full scope of any loan—from its total cost and interest structure to repayment terms and additional benefits—empowers you to make informed financial decisions. By taking the time to ask these twelve questions, you can ensure that you’re not only prepared to manage your debt responsibly but also positioned to use borrowing as a tool for achieving your broader financial goals.

At Greater Nevada Credit Union, we’re dedicated to helping our members navigate the complexities of debt with confidence and clarity. Whether you’re considering a new loan or reassessing your current debt strategy, asking the right questions is the first step toward securing a healthier financial future.