Loans are very tricky. And so many times, we find ourselves caught up in situations where some extra money would go a long way in solving. You begin to ask yourself the questions “Should I take a loan? Is this loan right for me?” Just one slip up and you may discover that you’ve lost so much more than you wanted money to cover up for.
Before we go into whether or not you should take a loan, let’s give a brief explanation on what a loan is.
A loan is the lending of money (or money lent) by an individual or organization to another person. The recipient of this money incurs debt and have to pay within a period. If you refuse to pay, the interest on the money grows, your credit card score sinks, and you would lose so many things to repay that debt.
There are different types of loans for different purposes. But in this article, we would be answering a question non-specific to any type of loan. “Should I take a loan?”
Questions You Should Ask Yourself Before You Take a Loan
- How good is my credit score?
This is one of the most important questions to ask yourself before taking a loan. If you’re someone who likes to save, you wouldn’t want extra money lost to repayment. If your credit score is lower than 720, you should consider your financing options.
Do you know that the interest rate on your loan is much higher when you have a low credit score?
With your credit score sinking, the bank knows the risks involved are higher. So, they request for more money.
Instead of getting a loan, consider getting your credit score higher before taking . Even if what you need it for is important, you shouldn’t go for it.
- What exactly do I want to buy?
So, you hate the way your kitchen has looked the same for the past three years. You think it would be so great to get it refurbished but you don’t actually have the money. ‘Should I take a loan?’ You ask your friends before eventually taking it. When the time for repayment comes, there’s a high probability that you regret taking the loan.
Loans should only be used for getting essential things. For instance, you need a shelter to keep yourself and the family away from harsh weather conditions. If your house is really bad and needs urgent fixing, a loan can do some . Another example is your vehicle. Instead of taking public transport to and from work daily, and having to jump buses because you want to shop for groceries, you can get your car fixed with a small loan.
- Can I repay on time?
Can you get all the money (with interest) repaid before the loan term expires? This question is strongly linked to the first question. If you can’t repay on time, reconsider your financing options. When you don’t pay on time, your credit score goes in the red. Moreover, you never know what will happen in the nearest future. What if you lose your job? Will you still be able to repay on time? If you can’t pay back even during terrible times, you shouldn’t take a loan.
- What are the fees on this loan?
Every loan has its own fees. If you fail to look at all the added fees to your loan (including hidden fees), you may be repaying much more than you thought you would. Read the terms and conditions very carefully, so you’ll know the annual percentage rate (APR) and the total cost incurred when you get the loan. Some hidden fees which you would not see on the terms and conditions and might not be openly discussed (except you ask) include processing fee, prepayment penalty, late payment fee, and failed payment fee. Ensure you have all these sorted out before you decide to take the loan.
- What happens when I don’t pay off?
Do you ever wonder what happens in case you don’t pay off on time or try to run away (which is almost impossible)? You might be making things much worse in your life. For instance, in case you lose your job, you’re not easily getting a new one with that terrible credit score. So, what happens to you? You sit in some cave and wallow in self-pity. This still boils down to knowing how to get your loan repaid even in the worst cases (such as when you lose your job).
- Can I get something more affordable instead?
If you can get something more affordable, why are you even trying to get a loan. For example, you need a new car to get around. Instead of taking a loan to get a Porsche, why not get a basic car to get you around. You may not even need a loan for it. Not getting a loan in this case helps you save more and keeps you free of loan repayment worries.
Should I Take a Loan? – 4 Cases Where It’s Okay to Do So
So, we’ve drawn out some cases where taking loan is not a bad idea. But, this doesn’t mean you should go ahead to take a loan when you don’t need it.
- You qualify for a special loan
Anyone who is responsible financially wants to do away with anything related to loans. But sometimes, these loans are important in getting you to your financial goals faster. Special loans are usually given by the government and are used to take care of things like housing and education. They don’t have high interest rates attached to them. So, if you qualify for one, it’s okay to use it.
- You can pay off very early
As said earlier, you should only take a loan when you’re sure you can pay off early. One of such cases is when you’re expecting a large sum from someone that can be used to repay the debt. It is advisable that you don’t take long tenure loans. Keep it as short as possible and pay back on time. If possible, get a side job to provide extra money if you don’t think your 9-5 salary will feed you after all the fees have been taken away. In case of a side job, you should already have one before taking the loan. You can’t just hope it would come after taking the loan.
- It is very important
Some people love an extravagant life. This is not bad at all, but if you can’t afford it with your normal income, don’t take a loan to live that life. If you want to plan a large wedding, don’t take a loan. If you don’t have the money, make it simple. As said earlier, the necessities are things you need loan for. If you want to finance your education, government funding aid is advisable. Don’t take personal loans. Most people end up stuck with their student loans until grey hairs grow on their heads.
- Your credit score is great
We’ll keep over emphasizing on your credit score. If your credit score is not good enough, you have nothing to do with loans. The interest rate will be much higher, and your credit score still remains low. As mentioned above, get your credit score to standard before trying to take another loan. Also, do well to maintain the good credit score when you have it. It would help you a lot.
4 Cases Where You Shouldn’t Take A Loan
- You plan to use it for investment
If you plan to use the money from your loan for investment, think again. You should never lend money to invest in anything. What happens when your investment fails. You’re basically losing twice the amount you borrowed. Because you never used the loan you took, and you have to pay it back. Moreover, the interest on loans are usually higher than those gotten on investments. If you use the money for investment, you’ll probably still need some extra money to repay your debt. In case the investment promises high returns in a short while, it is too volatile. What if the market value drops?
- You’re robbing yourself of retirement funds
If you’re still very young, you may think this is okay and you can repay the money later. This might be true if your life goes out the way you planned. But if you’re older (40s and above), never take loans out of your retirement fund. This is still your decision to make, but most people don’t end up paying back the money they take from their retirement funds. A study has shown that over $60 billion is lost annually on 401k loans and there could be $201 billion reduction in wealth in US retirement accounts when compounded over time.
- You can’t get traditional financing
A payday or title loan is the next thing that comes to mind when you can’t get traditional financing from your bank. Your pocket gets full in a very short time and you’re very happy. But do you know you’re actually playing a risky game? These loans don’t require a credit check, but the terms for repayment are much different. For instance, you have to pay the entire money within two weeks of getting the loan. Also, the fees are so high, you would be paying almost a quarter extra of the money you borrowed. For example, if you borrow $200, you may be pay an extra $50.
Car title loans are worse. To get the loan, you use your title acts and car as collateral. If you’re unable to pay back your loan, they take your car. So, you should be very careful when trying to find quick money.
- The bank needs a cosigner
You don’t want to ever involve your friends or relatives into your financial business. Immediately the bank tells you that you don’t qualify, wipe your tears and figure out a way to fix this problem on your own. Get your credit score up and then try again.
Getting a cosigner is the bank telling you that someone else needs to help you patch your score up with theirs. Also, remember that what you do with this new loan affects their own credit score. So, if you mess this up, you’re messing it up for someone else. To avoid this, get yourself back in track before reapplying.
Getting a loan requires adequate planning and budgeting. Before taking the loan, ensure you have the means to pay back in a short time, and you can’t do without this loan. Never take a loan when you don’t have things figured out. In addition, don’t take out of your retirement, spend on unnecessary expenses, or involve your loved ones.
After going through the article, if you still qualify, go ahead and make sure you keep a good credit score.
When you finally get your finances in the right, here are some ideas on what to do with the money you make