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Borrow

What is responsible borrowing?

September 20, 2024
4
min read

Borrowing money is a convenient way to cover gaps in your budget when big expenses arise. But how do you know if you’re borrowing too much?

Couple signs loan documents with financial advisor

Whether you’re buying a car, planning your dream wedding, or getting your first home, it’s tough to fund life’s bigger purchases out of pocket.

At some point or another, you may get a bill that’s just too much to pay for all at once. Loans and lines of credit help you cover those expenses, so you can pay the money back over time.

That’s where responsible borrowing comes into play. It’s the practice of borrowing within your means and ensuring you can afford to take on debt before you do so.

Even for purchases that are essential to your life, it’s important not to bite off more than you can chew. Otherwise, you may struggle to pay back debt that keeps accruing more interest.

A responsible borrowing strategy helps reduce financial risks when taking out a loan or line of credit.

How do you ensure you’re not over-leveraged and are borrowing within your means? Here’s what you need to know about responsible borrowing:

Why is it important to borrow responsibly?

With the right strategy, you can:

  • Build your credit score and get closer to your financial goals.
  • Enjoy peace of mind knowing your loan or line of credit fits within your budget.
  • Cover life expenses and pay them back as you’re able to.

Borrowing money within your means is a mix of understanding your financial situation, assessing what you really need, and planning how you’ll pay it back.

How can you borrow responsibly?

Make sure to consider your current and future financial situation before taking on new debt. This will help you ensure you can pay back what you owe.

What purpose does the debt serve in your life? Before you borrow, ask yourself:

  • Is it to cover an emergency expense? You may need a loan to pay off unexpected costs and cover dips in your cashflow.
  • Is it to fund something you want, but don’t necessarily need? For example, a vacation or shopping trip. Try to avoid taking out loans for non-essential purposes, since it will strain your budget.
  • Is it to consolidate high-interest debt? Debt consolidation is when you take out a loan to pay off other debts. The idea is that you can wrap multiple sources of high-interest debt into one payment at a lower interest rate. Learn more about our PayOff Loan!
  • Are you investing in an asset? Consider if that asset is likely to appreciate or depreciate overtime. For example, if you buy a home that grows in value over time, that will offset the interest cost of your mortgage. To learn more, check out our blog on good debt vs bad debt.

When you work with a Cambrian Advisor, we’ll help determine the right decision for your financial situation!

What to consider before borrowing money

Before you take out a new loan or line of credit, consider the following:

Your income & interest rate may change

If you borrow beyond your means, consider that other expenses in your life may increase, too. Give yourself a buffer whenever possible, so that you have wiggle room if your budget gets tighter.

If you have a variable interest rate (which is typical for lines of credit), then your loan could become more expensive as rates change. This is something to be mindful of as you’re budgeting.

Do you need the money now?

Some expenses just can’t wait – like car repairs or household appliance breakdowns.

But when money is tight, consider if it’s possible to delay borrowing money until you’re confident you can pay it back.

This is highly dependent on the situation you’re in, but it’s worth discussing with a Cambrian Advisor to talk about your options. Contact us today to set up a meeting.

Consider your options

Not all loans are the same! Depending on what you need to borrow money for, you’ll be better suited for either:

A loan: This is a one-time lump sum of money you receive and pay back overtime, typically with a fixed interest rate.
A line of credit: A revolving source of credit which you can use on an ongoing basis whenever you need funds. It typically has a variable interest rate.

Make a repayment plan

How will you pay back what you owe? Using our Loan Payment Calculator, you can estimate the cost of your loan each month, and how long it’ll take to pay off!

Financial advice tailored to your lifestyle

At Cambrian, our advisors are here to provide you with personalized advice based on your unique financial situation. We can help you take out a loan, consolidate debt, and find financial solutions that work for you.

There’s no one-size-fits-all answer for whether a loan or line of credit makes sense for you. We can help you evaluate all the factors that go into your decision. Book a meeting to speak with a Cambrian Advisor today!

Today’s Rates

*All rates and yields subject to change without notice.
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“I had a wonderful experience at Cambrian. I've been with the same institution for the last 21 years and all the fees and restrictions have finally pushed me into wanting to make some changes.

My advisor was prepared for my arrival with all the documents ready and waiting. He took the time to go over each one...”

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Stephan

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