How To Borrow Money Wisely: Do's and Don'ts

The best loan is the one not taken but if you must:

Do the Whole-Household Worst-Case Scenario

• Spot logical fallacies. Forget expert recommendations or the plan that "most people" choose. They are not you. Do the numbers make sense for you?
• Forget eligibility limits of maximum loans, which are enticements to "overbuy" the lender's product (overborrow). What you could borrow is irrelevant. Stick to what you need and nothing more.
• Demand the disclosure of all payments over the lifetime of a loan (avoid the trap of low installments that add up to far greater final cost, especially through negative amortization).
• Check the bottom line of total costs, including combined interest rates, fees, surcharges, taxes, or required insurance. A favorite trick is to say things such as "5% more" or "5% over" and people hear "5%" even though the total interest might be 10% or higher.
• Question all assumptions (e.g. adjustable rates "estimated" to rise very little). Forget what "probably" will happen according to the optimistic salesperson ("You can always refinance later."). What "could" happen on the downside? Spot oxymoronic, tricky weasel phrases such as, "At worst, it probably won't go higher than . . . ." Probable is not the same as possible.
• Consider not only "worst case scenario" with that isolated loan but consider a combined worst case for your entire household (all current liabilities plus possible future medical emergencies, employment interruptions, etc.).
• Review all final written terms at the moment of closing. Do not rely on what the proposal was yesterday and especially do not rely on verbal assurances.
• The first thing to do with final papers is to check the last few pages, because a favorite trick is to pack surprises at the end of a stack of papers for when you are tired, bored, running late, and deeply "invested" in a long process (surprisingly, even people who spot a problem will succumb to a "too late" feeling, which of course is the intent of the trick).
• Take as much time as necessary to understand the final terms. The rushed sell is one of the oldest tricks so do not be intimidated. A broker in a hurry should have gotten up earlier that day or can return tomorrow. The broker will warn of dire consequences but Rule #1 of business deals is, Be willing to walk away. Feel free to make people wait for your signature--because that quick scribble represents years of your life.