saving for your child’s college while on a tight budget

Posted on: 15 October 2015

When you need money to cover a large expense, you might drop everything and head to the bank to meet with your lender. After all, filling out a little loan paperwork couldn't hurt, right? Wrong. If you misunderstand lending terms or borrow at the wrong time, it could hurt your financial future. Here are two questions you should ask your lender so that you can improve your chances of successfully repaying the debt:

1: "How does that credit score affect the interest rate?"

As soon as you finish filling out financial paperwork, your lender will pull your credit score to determine your interest rate. Although you might be tempted to listen for the monthly payment and ignore the details, that interest rate can dramatically affect how much that money costs you to borrow.

If you have a bad credit score, you might be stuck with a high interest rate that follows you for the life of the loan. To avoid problems, ask your lender to explain how your credit score will affect your rate. If your credit score is low, consider doing one of these things before taking out that personal loan: 

• Wait: Detrimental marks like late payments and previous bankruptcies can destroy your credit score, which is why it might be in your best interest to wait awhile before borrowing more money. Fortunately, because most bad marks are removed seven years from the date they were incurred, you might be able to dramatically improve your score by waiting a few months. Ask your lender when bad marks were added to your report, so that you know when they will come off.
• Appeal to creditors: Consider calling or writing to your creditors to ask about having the bad marks removed. Some companies allow individuals to settle owed debt for less than the original amount.
• Watch those inquiries: Keep in mind that multiple credit inquiries can also affect your credit score. If you have recently purchased a car, a home, or applied for a credit card, you might have extra inquiries on your account that could be hurting your interest rate. To improve your credit score, avoid applying for loans around the time you apply for your personal loan.

After your score is pulled, jot it down—even if you don't plan to move forward with the loan. Track your credit score by using free credit reporting agencies to monitor your progress. It might take awhile to improve that score, but it could make it easier—and less expensive—to borrow money in the future.

2: "Is this a secured loan?"

Although that loan might just seem like another monthly payment, debt is divided into two major categories: secured and unsecured. Secured debt is different because the borrower has to pledge collateral to borrow the money. Examples of secured debts are mortgages, car loans, and pawn loans. If you borrow money and then you don't pay back the lender, they can take back your home, car, or whatever possession you pawned.

However, unsecured debt works a little differently. When debt is unsecured, the lender simply gives you money without holding collateral. Examples of unsecured debt would be credit card loans or money from a friend or a family member. If you fail to make payments on unsecured loans, the lender has no option but to take you to court to sue you over the owed balance.

The distinction between secured and unsecured debt is important because creditors and financial institutions handle the debt differently. For example, if you ever file for bankruptcy, your unsecured debt might be wiped away, while your secured debt remains in place. Before you borrow money, ask your lender whether or not the loan is secured. Ask about late fees, penalties, and collection proceedings. By understanding the worst case scenario, you might be able to choose a loan that works for your situation.

By taking the time to discuss your loan with your lender, you might be able to fend off frustration and heartache in the long run.