5 Considerations Before Taking Out a Loan
You may find yourself in a situation where you don’t have enough money for daily expenses. A loan is not the best way to pay for them. This is what emergency funds are for. But when your expenses are bigger than you can afford, and you don’t have any other good options, a loan is one solution that can help.
There are plenty of potential scenarios why you might need a loan. Before you borrow, be sure to carefully consider why you are borrowing and how you are going to repay the money. Borrowing is not necessarily bad if it helps in the long run and doesn't make you worse off. If you're thinking about borrowing money, here are 5 considerations to think about before taking out a loan.
1. Talk To Your Family
Before you take a loan, discuss it with your family. This is important because
the repayment will impact the overall finances of the entire household. Make
sure your spouse is aware of the loan and the reasons for taking it. Keeping
your partner in the dark on money matters not only increases stress in a
relationship but also precludes your chances of finding a more cost effective
solution. Maybe your partner has some spare money which can help you avoid
taking the loan altogether. Don’t miss out on that opportunity by keeping your
need under wraps.
2. Read Contracts Carefully Before Signing
Loan documents don’t make for light reading. Paragraph after paragraph of
legalese printed in a small font can be a put off. Yet, read the terms and
conditions carefully to avoid unpleasant surprises. Set aside a quiet
afternoon with your red pen in hand and make sure it all gets covered, even
if it’s quite dry. Break it up with your latest Netflix obsession if you
must – just make sure it all gets read! If you are unable to understand the
legalese, get a financial advisor to take a look at the agreement before you
sign it.
You contract should never be a sign-and-forget exercise. Keep your eyes and
ears open about the new rules and changes in interest rates. SARB is always
changing the base rate formula, which could change the way your bank
calibrates its lending rates.
3. Don't Borrow More Than You Need
One of the golden rules of taking out a loan is to never bite off more than
you can chew. Take a loan that you can easily repay. One thumb rule says that
your car loan should not exceed 15% while personal loan should not account for
more than 10% of the net monthly income. Your monthly outgo towards all your
loans put together should not be more than 50% of your monthly income. Don't
take out a loan with a longer paying period. The longer the period, the higher
the interest that the bank earns from you. It is best to take a loan for the
shortest period you can afford.
4. Always Compare Prices
We go to multiple stores to compare price and quality of a particular
product when we decide to purchase it. Whether it is a small thing or a big
one we all get active in terms of purchase bargaining and finding the best
deal available. Same approach is required as well in case of financial
products too especially loans. There are a number of banks offering
different kind of financial products at different rates. But it is a matter
of fact that the rate of a financial product may varies from lender to
lender.
5. Make Sure You Can Pay The Loan Back
Don’t take a loan just because it is available. Make sure that your
loan-to-income ratio is within acceptable limits. First, prepare a budget and
list your monthly expenses, savings and debt in detail. Work out to see if you
can afford to repay each month. If you don't have spare money, you will find
it hard to make the repayments.
Even if you have the ability to repay the loan, do not borrow more than your actual needs. Choose a payment term that best suits your circumstances. Repay the loan as soon as possible – the longer you take to pay it back, the more interest you will pay.
Even if you have the ability to repay the loan, do not borrow more than your actual needs. Choose a payment term that best suits your circumstances. Repay the loan as soon as possible – the longer you take to pay it back, the more interest you will pay.
Remember, before you take out a loan, make sure that you understand
the difference between what you need and what you want. You also need to
know how much money you can afford for loan repayments.
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