Borrow today, get ahead tomorrow: The basics of selecting a loan

    CNN’s Larry King once asked Donald Trump, “You are in debt, right? You owe money.” Trump replied, “Always … you don’t build billions of dollars of net worth unless you’re going to go out and borrow money.”     While it’s likely many of us will never have the wherewithal or even desire to build a luxurious skyscraper bearing our own name, we can all learn something from Trump’s exchange with King: oxymoronic as it may seem, incurring debt can be the foundation for a financially secure future…provided you are smart about what and why you borrow.
Borrowing begins
with a budget and questions
    There are two reasons why people borrow money: to create opportunity and to finance a lifestyle. There are also two considerations that people should weigh before making the decision to borrow money: What room is there in my budget for additional debt? What will having this money accomplish?
    Creating a budget is quite simple. It is a matter of balancing what you earn against what you spend. So the first step is to begin making a list of your expenses: housing, utilities, transportation, groceries, dining out, gifts, Internet, cell phone, weekend trips, DVD rentals, music downloads, haircuts, etc. Then, for a period of one month, document every purchase—this is your cash outflow. Next, determine your monthly after-tax income—this is your cash inflow. What remains is your personal net cash flow.
    The benefit of creating a budget and determining your personal net cash flow is that it allows you to assess what kind of borrower you can afford to be…provided you have the credit.
    Establishing a strong credit history is the key to borrowing
    For some first-time borrowers, there is a common misperception that not carrying debt equates to a strong credit score. This is not true. A strong credit rating is determined by an individual’s ability to repay a loan based upon their prior financial history. This is important to know because the difference between poor/no credit, good credit and excellent credit can be the difference between what type of housing you are able to secure for yourself, the type of job you can work and/or thousands upon thousands of dollars in increased interest when financing your house, car or child’s education. In some cases, a weak credit rating can prevent an individual from receiving any financing at all.
    Just as important as establishing a strong credit rating is ensuring that your credit rating is accurate. Why? Because according to a recent U.S. Public Interest Research Group survey, 79 percent of the credit reports on 200 adults surveyed had mistakes, and mistakes on credit reports cost consumers money.
    There are many different ways to finance everything from real estate transactions to college educations, boats and hobbies. So the first thing to do when thinking about a loan is to educate yourself about the options available to you, which include: credit cards, student loans, auto loans, mortgage loans, home equity loans, home equity lines of credit, personal loans, personal lines of credit, overdraft protection and/or boat and RV loans.
    Each of these loan and line of credit options exist to provide flexibility, and the details can and often do vary greatly from product to product and lender to lender. Therefore, to shop wisely, it helps to understand a few common terms.
• Interest: The amount of money the lender charges you for borrowing money. Interest rates can be either variable or fixed.
• Variable Interest Rate: The rate may change during any period of the loan term, as defined by the loan agreement.
• Fixed-Interest Rate: The rate means remains the same throughout the term of the loan.
• Length of Loan: The period of time in which a loan must be repaid, usually in months.
• Fees: What a lender charges for the services it provides. Examples include application fees, service charges, maintenance fees, late fees and early payment penalties.
    Good judgment comes down to borrowing as little as possible, under the best terms possible and with the shortest repayment period possible. Because when it comes to borrowing money, the goal is not to dig a fiscal hole but to create opportunity.
    Cheri Doak of Caribou is senior vice president and retail banking leader at Key Bank. She works out of the Presque Isle office and can be reached at (207) 764-9425 or cheri_doak@keybank.com.