Image Source. Licensed under Creative Commons.
It’s easier than ever before to take out a loan. There are now so many lenders out there catered to different types of people that you can almost always find a loan suited to your needs. However, just because loans are an easy option doesn’t mean that they are the best option. You’ll spend more money in the long run by paying for something with a loan. To ensure that borrowing money is the best decision, here are some questions to ask yourself first.
Is it for a good cause?
You should only take out a loan for things that you need (e.g. food, medical bills, home repairs) or things that will financially benefit you in the future (e.g. education, owning property, starting a business). Taking out a loan to pay for designer clothes or a vacation generally isn’t a good cause. These are things that you don’t physically need and aren’t likely to have any investment value – you’re much better of saving up for these things so that you can appreciate them as a reward.
There are specialist loans out there for specialist causes ranging from funeral home loans to medical loans. These can sometimes have perks such as better interest rates than general loans. If you can’t find specialist loans set up around your cause, it’s probably a sign that you shouldn’t be borrowing money for that cause (for instance, you’re not going to find many gambling loans or alcohol loans out there).
Have you looked into other forms of funding?
Before taking out a loan, it’s worth also considering other forms of funding. This could include making money by selling your clutter, asking for an advance at work or taking up odd jobs online. In the case of starting up a business, you may even be able to consider options such as crowdfunding. Then of course there’s the slow but effective option of saving up.
If none of these forms of funding are suitable option, only then should you consider resorting to a loan.
Is your credit score high enough?
Having a low credit score could cause you to be rejected by certain lenders. Whilst there are bad credit loans out there, they often have high interest rates that aren’t fixed – meaning that you can spend an awful lot more in the future.
Your credit score is affected largely by how well you pay your bills on time, but it can be affected by other factors to such as how well your financial details match up (if you have lots of accounts under different addresses, it could reflect badly on your credit score). Credit builder schemes can be a way of rebuilding your credit score fast. Alternatively, you may be able to rebuild your credit score slowly over time by making a conscious decision to pay bills on time and pay off debts.
Can you afford the repayments?
Taking out a loan could mean paying more each month. If you’re already struggling to pay all your bills each month, it may not be wise to then add loan repayments to the mix – you could end up with mounting debts as you’re unable to pay all your bills. Assess your monthly budget and decide whether you can realistically afford to also pay loan repayments each month on top of your other outgoing costs.
Leave a Reply