Sometimes, it makes sense to borrow money for things that improve your life over the long term. But borrowing can also be expensive if you don’t manage your debt wisely.

Before you apply for a personal loan, take some time to review your options and make sure the monthly payment fits in with your budget. This will help ensure you’re not overborrowing.

1. Don’t Overborrow

It’s surprisingly easy to overstretch your budget by borrowing more than you can afford. If you borrow too much, you may end up paying thousands in interest and hurting your credit score (because you’ll be paying more than what you borrowed). It might also make it harder to afford essential expenses like rent, utilities and food.

Luckily, there are ways to prevent over borrowing. You can start by determining what you need to borrow and how much it will cost in total. Then, compare lenders to find the best rates and terms. This could save you a lot of money in the long run!

You can also avoid over borrowing by carefully monitoring your debt and creating a solid plan for repayment. Keeping your balances low and making payments on time can help you build up your credit scores again, which will make it easier for you to borrow in the future.

Before you apply for a personal loan, be sure to check your credit report to ensure there are no inaccuracies that could hinder your chances of approval. You can get one free credit report per year from each of the three credit bureaus. And remember to shop around: rates and fees vary widely by lender.

If you have a strong income, you might be able to qualify for a personal loan from a bank or online lender. These loans typically offer competitive rates, and you can often get approved quickly. However, these types of loans tend to require collateral, such as your home or car. And you’ll likely have to pay higher interest rates than unsecured loans for people with good credit.

If you’re unsure whether a personal loan is right for you, consider consulting with a certified credit counselor. They’ll discuss your finances with you and identify a repayment plan to help you get back on track. They can also teach you how to use a debt avalanche method, which is an effective way to reduce your debt load. You can also ask family or friends to lend you money. Just be sure to have a clear conversation about expectations and put everything in writing. And if you decide to borrow from someone you know, consider finding a cosigner.

2. Create a Budget

It’s important to create a budget before taking out any loan. This will help you understand what your monthly payments will be and if they will fit into your overall financial plan. Then, you can prioritize your debts and savings goals.

To create a budget, start by calculating your net income. This is your total income minus all of your expenses. If you find that your current budget is not working, try making small changes. For example, you may be able to save more by lowering your spending or increasing your income through a side hustle or another source of income.

For businesses, creating a budget is also important. This will show lenders that you are focused on achieving a profitable financial position. It will also allow you to plan for a sustainable debt-to-equity ratio.

Once you’ve created a budget, you’ll need to determine which expenses are most important. For most people, this will include basic living expenses and debt payments. If you can, set aside a starter emergency fund of several months’ worth of bare-bones living expenses. This can help prevent relying on credit cards during emergencies or unexpected costs, which can lead to more debt.

If you need to borrow, choose a personal loan that offers a reasonable interest rate and manageable terms. Avoid payday or title loans, which typically have extremely high interest rates and are designed for desperate borrowers. These loans can quickly add up and cost you two or even three times what you borrowed.

Once you’ve established a budget, you can start to pay off your debts. For most, this will require aggressively paying down high-interest debt and continuing to pay at least the minimum on any other outstanding debts. If you have any lump sums of money or extra funds at the end of the month, consider directing them toward your debt repayment, as this can accelerate your progress. You can also ask friends or family to lend you money, but this should be a last resort. Their money could be earmarked for other important goals, and they might not be willing to risk it.

3. Review Your Options

If you find yourself needing to borrow, it is important that you evaluate your options. This means considering the purpose of the loan, the terms of repayment, and the total cost, including fees and interest. Then, compare these factors to your budget and financial goals.

Taking out a personal loan is one way to fund an expense or purchase, and it may make sense in some circumstances. For example, if you have high credit card debt and are looking to lower your credit utilization ratio, a personal loan could be beneficial. However, it’s also important to remember that you can save for purchases in advance and avoid the need to borrow altogether.

In some cases, a personal loan may be necessary if you have an emergency expense, such as a medical bill or home repair. In this case, the fast turnaround of a personal loan could be more convenient than a lengthy wait for your bank to process a deposit or a check. Additionally, personal loans are typically unsecured, which allows you to receive funds faster than a secured loan would.

When choosing a lender, it’s best to shop around for the lowest rates and costs. Be sure to review each lender’s required documents, such as proof of income and a debt-to-income (DTI) ratio. Then, carefully consider each lender’s approval timeline and funding speed to ensure that it meets your needs.

It’s also worth noting that some lenders charge fees for the privilege of extending you credit. These additional charges can quickly inflate your overall loan cost. Finally, it’s a good idea to review the lender’s customer reviews and reputation before applying. Avoid any lenders that promise approval without assessing your credit or ask you to send money before confirming your loan.

Borrowing from friends or family is another option, but this can be stressful and cause strain on relationships. If someone is willing to lend you money, it’s a good idea to establish clear terms and a written agreement in order to avoid any conflict or strain. Lastly, if you have equity in your home, you can also choose to take out a home equity line of credit. These can have a lower interest rate than personal loans and are often backed by collateral, which makes them less risky for the lender.

4. Make Payments on Time

Paying off debt on time helps to build good credit, which is a positive factor in improving your financial health. It also helps to keep you from paying costly late fees. If you are worried about missing a payment, contact your lender as soon as possible (ideally before you are 30 days late). They may be able to work with you to create a different financing arrangement that allows you to continue making payments on time and avoid damaging your credit score.

If you can afford to, make bi-weekly or monthly payments instead of the standard monthly ones. This simple step can cut the life of your loan by several months or even years, saving you a substantial amount in interest charges. If you have a windfall from a work bonus, tax refund or other source, consider using it to pay down your loan balance early. However, before you do this, check the fine print on your loan agreement to be sure there is no prepayment penalty.

Another way to make your loan more manageable is to use a credit card that offers a revolving account. This will allow you to draw money based on your needs and only pay interest on what you actually use. This is ideal for borrowers who aren’t sure how much they need to borrow.

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