How to Make Borrowing Decisions

There are a lot of factors to take into consideration when searching for a credit card or loan option. We've outlined some of the aspects that are important to include in your comparisons.

Choosing a Lender

If you've determined that you should borrow money, take time to learn about the options available to you. 

Debt Type

Questions You Should Ask:

  • Do you need a credit card or a loan?

  • Is the debt secured or unsecured?


Here's Why: 

For larger expenses, you are likely better off taking out a loan. For smaller expenses, you could probably pay with a credit card instead. Whichever you choose, find out if it's secured or unsecured.

With a secured loan, the lender requires the borrower to offer an asset to secure the lender's money if you fail to uphold your loan agreement. The asset, along with your credit history, will help determine your interest rate. 

Credit cards can be secured, too. If you get a secured credit card, you will pay the lender an amount up front that you can continue to borrow and pay back over time. This is a good way to start building credit with no credit history. 

Unsecured loans and credit cards do not put any assets at risk, and instead bases your eligibility and interest rate on your credit history. 

Cost of Borrowing

Questions You Should Ask:

  • What is the APR?

  • What is the interest rate?

  • Is the interest rate fixed or variable?

  • How does interest accrue? Daily/monthly? Simple interest or compound interest?

  • Are there additional fees? If yes, what are they?


Here's Why: 

Before you borrow, you should know just how much it will cost you. APR is a great tool for comparing loan or credit card options, as it represents the total cost of borrowing (including the interest rate and all fees). However, you might consider learning more about the broken down costs to understand more about how those costs are created. Keep in mind that with a variable interest rate you won’t be able to accurately predict exactly how much you’ll pay in future months. That also means that the rates could become lower over time.

Borrowing Terms

Questions You Should Ask:

  • When do payments come due?

  • How long is the grace period?

  • How long is the loan term?


Here's Why: 

You should be fully aware of the terms of the borrowing agreement before you enter. Know what's expected of you, and follow through.


Questions You Should Ask:

  • Does one lender offer more or better services than another?


Here's Why: 

Compare lenders, not just loans. The total cost may not be the only factor that matters to you. Identify a lender that offers customer service to your standards. 

Credit Effects

Questions You Should Ask:

  • Can you get pre-approved for the credit card or loan?

  • Will your bill payments be reported to the three main credit bureaus?


Here's Why: 

You want to prevent any adverse effects to your credit score as much as you can. You also want to make sure that your good financial behaviors are reported to the institutions that determine your creditworthiness. See if the lender you're considering offers a prequalification tool. Take the time to find out if you're likely to be approved. If your application is rejected, it could hurt your credit score. If you are declined, you can always call the lender and ask to be reconsidered or ask why your application was rejected. 

Specific Borrowing Options

There may be other aspects to take into considerations for specific borrowing opportunities.

A unique factor of auto loans and mortgages is the effect of the broader financial market. It’s crucial to pay attention to the trends of interest rates to help identify the best time of year to buy a car or home. Here are some tips from NerdWallet for purchasing a car or house.

Many retailers offer their own credit cards, often with enticing rewards. These cards may seem like fancier loyalty cards, but they’re still credit cards, and therefore carry the financial significance of credit cards. Conduct the same due diligence on these cards as you do for others, rather than acting on the impulse to sign up for a one-time discount.

If you want to get the most beneficial advantages out of your credit usage, search for cards that offer rewards. Some cards may offer cash back rewards for certain purchases. If this is the type of card you plan to pursue, remember that rewards cards can be enticing but may come with high fees and spending requirements. Read the fine print and find a card that suits your spending lifestyle.

SRFS provides a detailed overview of the federal loan options available to Penn students. Learn more here.

A Note About Credit Cards

If all these aspects seem overwhelming, at the bare minimum, remember this: Paying your credit card bill in full, on time, every month means you’ll avoid interacting with interest, grace periods, and many of the possible fees. If you find a card without an annual fee, there’s a good chance that you will never have to pay more than the amount you borrowed. Adhere to your card’s billing schedule to keep your credit score healthy and your costs low.