Some people love debt, while others hate it. People in the former category tend to use loans for everything. Those in the latter category avoid it at all costs. Both extremes can create problems. If you’re thinking about borrowing money, the smart approach lies somewhere in between.

The Do’s and Don’ts of Borrowing Money

When used correctly, debt can be a great tool for growing your money and improving your financial situation. When used incorrectly, it can be a nightmare. Here are some helpful do’s and don’ts regarding borrowing money.

1. DO: Know the Difference Between Secured and Unsecured

There are two basic types of loans: secured and unsecured. Knowing the differences between these loans can help you make smart choices.

A secured loan is backed by an asset – such as a house, car, or another valuable item. A home mortgage or auto loan is an example of a secured loan.

“Secured loan terms are typically based on the value of the collateral, making your financial history less of a factor,” RISE explains. “If you stop making payments on the loan, the lender can seize the asset—known as repossession or foreclosure—and sell it to recoup some of their losses.”

An unsecured loan is approved based on credit history and income, and there is no physical asset attached to the loan. Because of this, secured loans are harder to obtain and typically come with higher interest rates.

2. DON’T: Only Account for the Monthly Payment

When obtaining a loan, one of the biggest mistakes you can make is to only account for the monthly payment. For example, when buying a car, you may tell the car dealer that you can pay up to $350 per month. And while this may be true, it does little to protect you from a bad loan product. The lender may get you a lower monthly payment, but they’re going to extend the terms of the loan so that you ultimately end up paying more in interest.

In addition to making sure the monthly payment fits your budget, you need to look at the interest rate, length of the loan, payment terms, penalties, and fees.

3. DO: Read the Fine Print

The best way to do your due diligence on a loan product is to read the fine print. (After all, there’s a reason the company scales the text down to tiny, illegible font size.) If there’s something you don’t understand, ask for clarification.

4. DON’T: Carry Balances

Always make the minimum payment on your loans each month. And when it comes to bad debt – such as a credit card – make sure you’re not carrying balances from month to month. Making more than the minimum payment will allow you to unload this debt quicker.

5. DO: Develop a Budget

The only way to be smart with your finances is to develop a written budget that tells you exactly how much money is coming in and going out over a given month. If you’ve never developed a budget before, here are some tools to get you started.

6. DON’T: Keep Debt a Secret

“On a last note, you need to avoid keeping your debt a secret – especially when you are married or in a serious relationship,” National Debt Relief explains. “Talk to someone about your debt because that can help increase your sense of responsibility about that debt. If someone knows about it, then they are bound to check if you are paying it off.”

It’s easy to feel guilty about debt – like it’s a huge black eye on your life – but don’t hide it from people. Being transparent about your situation will keep you accountable and help you develop a plan of attack.

More Money, More Problems

They say more money creates more problems – which is especially true when it comes to debt. Keep this in mind and borrow responsibly. Money troubles will follow you for years – and they typically get worse before they get better. Always educate yourself before entering into a new contract or signing any financial papers.

Due diligence is your friend.

Frank Landman

Frank is a freelance journalist who has worked in various editorial capacities for over 10 years. He covers trends in technology as they relate to business.