Money problems never seem to cease. The moment you’ve resolved one issue, another one comes up. And it goes on and on like that.
For many people, taking out a loan can be a viable solution for money woes. But it’s important to make sure that this is the right decision for you, before you make a move to borrow money.
Keep in mind that doing so is giving your commitment to not only pay the money that you owe but to also pay added costs such as the interest rate. Plus, you need to complete the payment within a certain period.
So before you sign the loan application form, analyze your situation carefully to determine how much this will affect your finances and overall life, and if this is indeed the right move for you.
Here are some questions that you need to ask yourself before taking out a loan.
Question # 1 – Am I borrowing money for the right reason?
Before you even look for a lender to borrow money from, you need to ask yourself why you are applying for a loan in the first place. Remember, there are two types of debts. The first one is the good debt, which provides value for long-term, and the other is bad debt, which as the term implies, is not for practical purposes.
Some examples of good debt include:
- Buying a house
- Financing one’s education
- Opening a business
A few examples of bad debt are:
- Covering basic expenses
- Buying expensive and unnecessary items
Ask yourself if the reason you are borrowing money is worth all the effort and costs that you will go into once you apply for a loan.
Question # 2 – Are there alternatives to borrowing money?
While taking out a loan seems to be the answer to your money problem, keep in mind that this is not the only possible solution. There are alternatives that you can consider.
Let’s say you want to start an online shop, and you want to apply for a small business loan. Before you do so, why don’t you check your savings account, and you might just have the funds that you need? Or why don’t you consider partnering with friends or other people whom you think would be interested to do this business venture with you?
A loan can provide you with the funds that you need, but it is not always the best option.
Question # 3 – How much can I afford?
It’s a common mistake for borrowers to borrow more money than they can afford. Do not make this mistake. Before you apply for a loan, you must first analyze your finances. Determine how much income you make in a month, and how much money goes into your expenses.
Then, calculate the amount that you think you can comfortably pay for the loan. This way, you’ll know whether or not a loan is right for you. If you cannot afford the minimum monthly payment, then it means that you should steer yourself in another direction.
Question # 4 – How fast can I pay the loan?
When taking out a loan, do not only consider the amount of monthly payment that you can afford. You also need to take into account the duration of the loan. Remember, the longer the loan duration is, the more it will cost you money.
Question # 5 – What will happen if I cannot pay the loan?
It’s also a must to be aware of the consequences of defaulting on your loan payments. If you have taken a secured loan with your home as the collateral, can you really take that risk? Are you really willing to lose your home just so you can finance whatever it is that you think is important for you?
Question # 6 – Can I commit to paying the loan?
This is the probably the most important question of all: do you think you can really complete the loan payment? You can only answer this honestly if you know yourself well. Otherwise, you might be making a commitment that you will not be able to fulfill.
So you don’t get into any financial mess, make sure to ask yourself first these questions.