Borrowing Money Wisely: A Guide for Beginners 

People borrow money for various reasons, but it all boils down to one thing: they need money. A loan can be the answer to many people’s money problems.  

But of course, it doesn’t come without drawbacks.  

Below, you’ll find practical information about taking out loans, which any beginner should know about.  

Reasons for Applying for a Loan 

Before we go on to discuss the basic aspects of loans, it’s a must to first analyze why exactly you need to borrow money. Here are some of the common purposes of loans: 

  • Home ownership – Many people cannot afford to buy a house using their savings. They turn to mortgages instead.  
  • Educational expenses – Student loans are some of the most common types of loans that allow students to cover the expensive costs of studying in college or obtaining post-graduate degrees. 
  • Car ownership – Having a car is convenient especially if you have to travel from your home to your office daily, and if public transportation is not a practical option in where you reside. Like a house, a car can be quite expensive, and many have to rely on car loans to be able to purchase one. 
  • Starting a business – To start a business, you need enough funds for inventory, equipment and manpower. Many startup business owners turn to business loans to finance business operation.  

Places to Borrow Money 

There are many places where you can borrow money but you need to compare loan products, particularly the costs so you can get the least expensive.  

  • Banks – This is probably the first option on your list. Make sure that you consider both big banks and community banks, and get quotes from several banking institutions before making a final decision. 
  • Credit union – A credit union is another type of lender where you can borrow money. It works similarly to a bank but the difference is that this one is owned by the customers instead of a group of investors. Credit unions usually offer better costs than banks. 
  • Online lender – This is the newest among the list of options. Funds that are used for lending money come from various sources. Online lenders also offer competitive rates and quicker application process. 
  • Mortgage brokers – You would want to take a look at this option if you are thinking of buying a home. You can find out more about this lender from your real estate agent.  

Types of Loans 

Loans come in different types and features. Some loans have specific purposes (home loans, car loans and so on) while other types can be used for any reason that you have. 


  • Secured loans – A secured loan is a type of loan that is backed by collateral. If the borrower defaults on payment, he/she will lose the property that was used as collateral. This has lower interest rates as it imposes lower risk on the lender. 
  • Unsecured loans – An unsecured loan is the exact opposite of the secured loan as it does not require any collateral. Since it imposes higher risk for the lender, the lender offsets the costs by charging the borrower with higher interest rates. 


  • Student loans – Student loans provide funding for educational expenses. 
  • Home loans – This type of loan is used for purchasing a home or any real estate property. 
  • Car loans – Otherwise known as an auto loan, this is what you take on to purchase a vehicle.  
  • Business loans – A business loan provides startups with capital to start a business. There are also types of business loans that can be used for purchasing inventory, improving a business and so on.  
  • Consolidation loans – A consolidation loan combines several debts into a single payment to make it easier for the borrower to resolve it.  

Other types 

  • Payday loans – A payday loan is a type of loan that is paid during the payday, hence the name. 
  • Personal loans – A personal loan can be used for whatever purpose a borrower deems necessary. 

Tips for Beginners 

Before taking out a loan, you need to do the following so you know what you are getting into: 

  • Shop around. Do not apply with the first lender that you see in the financial market. Make a comparative analysis of different loan products, taking into account not only the interest rate but all the other costs that will be incurred. You also need to consider the amount of monthly payment and loan duration to ensure that you are getting the most practical option.  
  • Improve your credit rating. Improve your chances of approval by checking your credit report first. Work to improve it before applying for a loan. 
  • Lower debt-to-income ratio. Get rid of other debts first before taking out a loan. 
  • Study the costs and risks. Each loan type comes with its own benefits, drawbacks and dangers, which you have to know about before choosing one to apply for. 

Anyone who is thinking about applying for a loan should study extensively about it as not to encounter any problem in the future.