Taking out a loan can help you handle big expenses, but it’s not something you should jump into without a plan. Whether you’re looking to cover an emergency, fix up your home, or pay off other debt, it’s important to make sure your finances are in the right place before you borrow. For example, effective money management in ND, or anywhere else, starts with knowing your budget and planning.
1. Check That You Have Money Left Over Each Month
Before you think about applying for a loan, ask yourself a simple question: “Do I have extra money left at the end of each month?”
That’s your monthly surplus — and it’s what you’ll need to cover your loan payments. If you’re already struggling to pay your bills or relying on credit cards to get by, adding another payment could do more harm than good.
Start by adding up your total income. Include your paycheck, any freelance work, and other regular income. Then list all your monthly expenses: rent, food, utilities, insurance, transportation, child care, and debt payments like credit cards or student loans. Subtract your expenses from your income to see what’s left.
Lenders will look at your debt-to-income (DTI) ratio, which shows how much of your income goes toward debt each month. To calculate it, divide your total monthly debt payments by your gross (before-tax) monthly income. Multiply by 100 to get a percentage.
Ideally, your DTI should be 36% or lower. Some mortgage lenders allow up to 45%, and FHA loans may go as high as 50%, but those are exceptions. If your DTI is higher than 40%, most lenders will consider you a risk. Try to lower your debt or increase your income before taking out a new loan.
2. Set a Borrowing Limit That Fits Your Budget
Many people borrow too much because they qualify for a large loan. But that’s not always smart. Just because a lender says “yes” doesn’t mean it’s the right move for your wallet.
Figure out exactly how much you need — nothing more. For example, if you need $7,000 to cover a home repair, don’t borrow $10,000 “just in case.” Add a small buffer if necessary, but avoid overdoing it.
Next, check how much of a monthly payment you can handle. Use online loan calculators to test different loan amounts, interest rates, and repayment terms. Pay attention to the total repayment amount too — not just the monthly bill.
If the loan comes with a variable interest rate, plan for what your payment might look like if interest rates increase. That way, you won’t be caught off guard down the road.
In general, it’s a good idea to keep all non-housing debt payments under 20% of your take-home pay. That provides you with sufficient flexibility for savings and unexpected expenses.
3. Cut Back on Extra Spending Before You Add New Debt
Before taking on a new loan, review where your money is going. If you’re spending on things you don’t really need, now’s the time to make changes.
Review your bank statements and highlight any non-essential items. Look for:
- Streaming subscriptions you don’t use regularly
- Gym memberships you’ve forgotten about
- Takeout orders more than once or twice a week
- Clothing, gadgets, or other impulse buys
- Any subscription services that renew automatically
Cutting just a few of these can save you $100–$300 a month — money you can put toward loan payments, savings, or paying down existing debt.
Trimming your spending also helps you look more responsible to lenders. And if you use that saved money to pay down credit card balances, it can boost your credit score, too, by lowering your credit utilization rate.
4. Pay Off Small or High-Interest Debts First
Before taking out a new loan, it’s smart to get rid of smaller debts or anything with a high interest rate — especially credit cards, which can easily charge over 20% interest.
There are two popular ways to do this:
- Avalanche method: Pay off the debt with the highest interest rate first.
- Snowball method: Start with the smallest balance to achieve a quick win, then proceed to the next.
Either approach works — just stick with it. Even paying off one or two smaller debts can help lower your DTI and improve your credit score.
If you qualify, consider a 0% APR balance transfer card. These let you move your high-interest credit card balance to a new card with no interest for 12 to 18 months. Be sure to pay it off before the introductory period ends.
Lastly, check your credit report at AnnualCreditReport.com. You can get a free report from each bureau once a week. Dispute any errors and make sure everything is up to date. A clean report can help you get better loan terms.
5. Build an Emergency Fund So You Don’t Rely on the Loan
Loans are for planned expenses — not surprises. If something unexpected happens after you take out a loan, like a car repair or medical bill, you’ll need backup cash. That’s why you need an emergency fund.
Most experts recommend saving at least three to six months’ worth of essential expenses. That means rent or mortgage, utilities, groceries, insurance, transportation, and anything else you can’t skip. If that feels like too much, start smaller. Aim for $500 to $1,000 as a starting point. It’s enough to cover many common emergencies.
Here’s how to build it:
- Open a separate savings account
- Set up automatic transfers from your checking account
- Use tax refunds or bonuses to build it faster
- Avoid touching it unless it’s a real emergency
An Emprower survey found that 37% can’t afford an unexpected expense of over $400 without borrowing. Don’t let that be you — especially while you’re managing a new loan.
Final Personal Finance Tip: Ask Yourself If This Loan Still Makes Sense
Once you’ve taken the time to organize your budget, cut back spending, pay off some debts, and build a small emergency fund, it’s time to hit pause.
Ask yourself:
- Do I still need this loan?
- Can I wait a few more months and save instead?
- Have I compared at least 3 lenders?
- Do I fully understand the interest rate, fees, and repayment terms?
If anything feels off, it’s okay to wait. There’s no rush — and waiting could save you money and stress. But if you are sure, budgeting before a loan, then go ahead – just explore all the options first. Use tools from the Consumer Financial Protection Bureau (CFPB) to compare lenders. Look at the APR, not just the interest rate. Always read the full terms before signing.