Borrowing money can be intimidating and scary.

What do all the numbers and rates mean, and will I be able to pay it back?

When is the right time?

Hi.

I'm Nico Gargiulo.

And today on Adulting, we're talking about borrowing money.

[music playing] Borrowing money for a big purchase such as a house or a car can be a little scary and a lot confusing.

There are several factors to consider and many things to understand, but if we want to make these big purchases, chances are we're going to have to borrow money.

So how do we do that?

And how do we make sure we understand what we're getting into?

[music playing] So why do we borrow money in the first place?

Usually, it's to help us afford a big purchase, such as a house or a car.

These things are super expensive, and most of us don't have the cash to pay for them upfront.

So we borrow money, usually from a bank or other lender, to help us make up the difference.

When borrowing money, it can help to think of it as an investment.

For example, when we take out student loans, we're investing in our education.

When we borrow money to buy a house, we assume the value of that house will continue to increase.

Borrowing money doesn't just allow you to make a large purchase in the moment.

It should also be an investment in the future.

[music playing] When we take out a loan and therefore take on debt, we are being given credit by the lender who is giving us the loan.

Essentially, they are giving us the money we need now, under the agreement that we will pay back that money over time with interest.

There are two types of credit we should be aware of-- revolving credit and installment credit.

Revolving credit are things like credit cards, debt that you continue to borrow and pay back, usually in small amounts.

Installment credit is debt you take on with a set schedule to pay back.

This kind of credit is typically taken on for larger purchases, such as a house, car, or student loan, and it will have a scheduled payment plan that you're expected to meet.

[music playing] Taking on debt can have benefits such as helping us make a big purchase, but it also comes with risk that we need to understand.

When you take out a loan and then take on debt, it comes with an obligation to pay it back, so you should be confident that you will be able to repay a loan before taking on any debt.

Be sure you understand the payment structure, the amount you'll pay every month, and how long you'll need to make those payments.

If you're unable to meet your obligation, it can damage your financial reputation, potentially making it harder to find places to live, get certain jobs, and borrow again in the future.

[music playing] Taking on debt isn't just risk.

It can also have some important benefits.

Taking on debt and making your payments each and every month can help you build credit.

This means your credit score will increase over time as you continue to meet your obligation.

Having a high credit score can make it easier to borrow money in the future and even make the interest rates of future loans lower.

Essentially, a high credit score says to lenders, I'm a good investment.

This can make big purchases in the future a little easier.

[music playing] Taking out a loan and taking on debt can often be the easy part.

Managing that debt is where things can get a little tricky.

Before taking out any loan, it's important to make sure you will be able to pay it back.

An important part of any debt is using a budget to ensure you will be able to make your payments every month.

Before you take on debt, make sure your budget can handle the new expense.

And after taking on debt, track your spending so you always have enough money to make your payment each and every month.

[music playing] Sometimes, even with good intentions and a solid budget, we can get in over our head.

If that happens, it's important to know there are resources that can help.

First, make a plan to overcome whatever is stressing you out.

If you have multiple loans, you can look at the snowball method of tackling debt smallest to largest, or the avalanche method of tackling the highest interest rates first.

Consolidating can help roll all your payments into one lump sum.

This can lower the total interest you are paying and make managing debt easier.

If your interest rates start to feel too high, it can be possible to refinance certain loans for a lower interest rate by increasing the amount of time it will take to pay it back.

If you're having trouble, for whatever reason, it's important to talk to an expert and communicate with your creditors to try to figure out a plan that will work.

Reach out to your lender to learn about ways they can help.

There are also finance and mental health professionals available to help.

[music playing] OK, that was a lot of information.

So let's recap what we discussed.

First, taking out a loan can help us make big purchases we otherwise would not be able to afford.

Second, taking on debt can have both risks and benefits.

We should understand both before taking out a loan.

Third, debt needs to be tracked and managed actively.

It's important to meet our obligation every month.

And last, if we get into trouble, there are people and organizations that can help.

If you get in over your head, be sure you look for the help that you need.

I'm Nico Gargiulo, and thanks for joining us on this episode of Adulting.

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