Are you thinking about taking out a loan? It might be because you’re looking to buy a home, a car, or something good to add to your living room. It might be because you’re looking to go back to school. Or it could be for a number of other reasons, and that’s fine. Many of us take out a loan from time to time, as that extra money can serve us well in both the short and the long term.
However, care does need to be taken. While taking out a loan can sometimes seem like the sensible thing to do, we shouldn’t sign on any dotted line before asking ourselves a few key questions first. Questions such as the following, for example.
#1: Do I Really Need to Take Out a Loan?
It might be that you do need to take out a loan, especially if you’re buying something as expensive as a house. However, there are occasions when you might not need to take out a loan. It might be that you could raise the money yourself, for example. For certain purchases, you could save up for them instead of putting yourself at risk of debt. You could also borrow money from friends and family members if they are willing to help you, or you could make more money, perhaps by taking on a side hustle. When you use alternative methods to attain the money you need, you won’t be stuck with loan repayments for the next few years of your life.
You should also consider your motivation for taking out a loan. If the money is for something you really need, then fine. But if it’s to buy something that isn’t necessary for your life, it is worth thinking twice. We all like to have nice things in our lives, but if the nice thing you are considering could put you at risk of debt, you might want to think twice. As we suggested a moment ago, you could save or make money to buy the item instead. Alternatively, you might decide not to buy the thing you’re after, especially if you come to realize there are better ways to use your money.
#2: Can I Afford the Loan Repayments?
The last thing you want to do is fast track your way into a life of debt. This is something that might happen if you can’t afford the loan repayments, as you might then be tempted to take out further loans to pay off your current creditors. So, calculate the costs of any loan first, taking the interest rates and repayment fees into consideration. Speak to an accountant if you need expert advice or use a loan amortization calculator to calculate the expected costs. If you find that you can afford the loan repayments, then fine.
However, if you suspect you might struggle, especially if your financial position is already unstable, you might want to do one of two things. For one, you might decide against taking out a loan in the first place. Or you might want to shop around and check out other loans, as you might find a loan provider with fairer interest rates and fewer problematic fees.
#3: Will the Loan Help My Debt Situation?
If you’re already in debt, you should definitely think twice before taking out another loan. Especially if you are already struggling to manage financially, another loan could damage your financial situation further. Of course, you might be considering a loan for debt repayment purposes. Many financial providers offer debt consolidation loans, and if you shop around, you should find somebody who will give you the means to manage your debts and eliminate them sooner.
However, you might simply be looking to take out a loan to keep your creditors off your back, so if it isn’t for consolidation purposes, you should consider these ways to get out of debt before digging yourself into a bigger hole. A debt relief charity can also help, so look online for an organization in your area, and seek their professional advice.
#4: What Is My Credit Score?
A good credit score will show lenders that you can manage your credit obligations, so they should offer you favorable rates on the loan you are wanting to take out. A bad credit score, on the other hand, will not serve you well. The lender might hike up the interest rate, or they might turn down your application. If you are turned down, you might be tempted to use a less-than-reputable loan provider, including those who offer payday loans regardless of your credit rating. This could become an issue for you, as their interest rates will be significantly higher than those offered to you by your bank or any other legitimate source.
So, before you apply for a loan, do your homework first. Check your credit rating online, and if it’s not in great shape, hold off for the time being. As we suggested earlier, there are other ways to get the money you need, so consider all of your options before taking out a loan you might later regret.
#5: What Does My Financial Future Hold?
It might be that you can afford loan repayments now, but what about the future? If you suspect you might struggle to make those payments in the long term, you should reconsider taking out a loan. It might be that you’re considering bringing another addition into your family, for example, so there will be obvious expenses there. Or you might not be confident about your job security, so to take out a loan when you might one day have reduced income is obviously a mistake you should avoid. These are just a couple of considerations you might want to make, but there might be other situations that could disrupt your financial situation. While you can’t predict every life event, there will be some that you may be able to foresee already.
#6: How Much Money Do I Need?
If you decide a loan is necessary, consider how much money you need. It might be that you can take out a smaller loan if you can cover some of your costs in other ways, and you might also decide a smaller loan will cover everything you need the money for. The same applies to larger loans, of course, but the point is this. Don’t take out more money than you need! Many people don’t adhere to this common-sense rule, as they decide to take out more than they need with dollar signs in their eyes. They might suddenly come up with other things they would like to spend the money on, and these are usually things that they may not have considered useful in the first place.
So, be sensible. While that extra cash might come in handy should you take out a higher loan than you initially needed, remember that you will be faced with higher repayments and/or a longer repayment term. Focus on what you need the loan for, and if you do come up with reasons why you might want to take out a larger loan, let your head rule your heart to ensure you don’t get yourself into a financial muddle.
So, think about these questions the next time you’re thinking about taking out a loan. When it comes to money, it pays to be wise, so don’t do anything that you might regret later. Take time to think before signing on any dotted line, and do what is right for you and your financial situation. A little bit of common sense will stand you in good stead, both now and in the future.