The Complete Guide to Loans and Debt: How to Borrow Smart and Get Out of Debt

Quick answer: before you borrow, ask whether you really need the loan, what it will cost in total and whether the payment fits your budget. Compare the APR and total cost, avoid payday loans, and if debt is already a problem, start with a clear payoff plan.

Borrowing isn’t bad: the right loan can help you buy a car, cover an emergency or escape expensive debt. The problem is choosing badly. This guide brings together everything you need to borrow smart and get out of debt, with links to our detailed guides. Unsure what APR means? See the glossary.

Part 1: Before you borrow

3 questions to ask yourself

1. Do I really need it, or can I wait and save? The cheapest loan is the one you don’t take. An emergency fund prevents many loans.
2. What will it cost in total? Compare the APR and total cost, not just the monthly payment.
3. Does the payment fit my budget? Check your 50/30/20 budget.

How expensive is “expensive”?

• Credit cards: usually 20% to 30% APR.
• Personal loans: depend heavily on your credit.
• Many consumer advocates consider 36% the reasonable maximum for a personal loan.
• Payday loans: can exceed 300% or 400%.

Part 2: Which loan fits you

Loans to avoid

• Payday loans and car title loans.
• “Guaranteed approval” offers.
• Anyone asking for an upfront fee before giving you a loan.

👉 Why to avoid payday loans and cheaper alternatives

Part 3: How to get out of debt

Step 1: Make a list

Write down every debt with its balance, APR and minimum payment. Always pay the minimums so you never fall behind.

Step 2: Pick your strategy

• Debt avalanche: highest interest rate first. Saves the most money.
• Debt snowball: smallest balance first. Keeps you motivated with quick wins.

👉 Debt avalanche vs. snowball, with a $10,000 example

Step 3: Lower your interest

If your cards charge high interest, paying less interest speeds everything up:

• 0% balance transfer card: ideal if you can pay it off in 12–21 months. 👉 How balance transfer cards work
• Debt consolidation loan: one payment at a lower rate. 👉 Debt consolidation loans

Step 4: If you can’t pay

There are more options, with very different effects on your credit: debt management plans, settlement and bankruptcy.

👉 Debt consolidation vs. settlement vs. bankruptcy

Before signing up with any “debt relief” company, talk to a nonprofit credit counseling agency.

Step 5: Don’t fall back in

• Build an emergency fund, even if it starts at $10 a week.
• Don’t run the paid-off cards back up.
• Keep a simple budget.

How loans affect your credit

• Paying on time builds your history.
• Paying down cards lowers your credit utilization and usually raises your score.
• Formal applications create a hard inquiry (a few points, temporarily). Prequalify first — it doesn’t affect your score.

👉 The complete guide to building credit in the U.S.

What borrowing $5,000 really costs

The same $5,000 repaid over 24 months:

The monthly payment changes less than you might expect, but the total interest more than triples. That’s why you should compare total cost, not just the payment. Have several debts already? See your payoff date with our free debt payoff calculator.

FAQ

Should I pay off debt or save first? Both, in order: first a small emergency fund ($500–$1,000), then expensive debt, then finish the fund.

Does consolidating debt hurt my credit? It may dip slightly at first, but paying on time usually helps — especially because your utilization drops.

Can I be sued over a debt? Yes, if you stop paying for a long time. If you’re sued, don’t ignore it: get legal help (many organizations offer free advice).

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This guide is for educational purposes only and is not financial or legal advice. Read our Disclaimer.