What do I need the money for?
Taking a loan can be a costly undertaking, and so before you obtain one, make sure you will be using it for something really important. Despite the fact that there are no actual restrictions as to where you can use the loan money, it’s not very ideal to borrow money for unnecessary expenditures.
How much do I need?
You also need to calculate exactly how much you’re going to need for that particular expense. While other borrowers would like to make room and borrow more than what they need, this could cost a lot. First, a higher principal means higher interests as well. Second, you’re likely to be tempted and use that money on something else that isn’t too important.
How much do I earn?
You also need to consider carefully if you earn enough not only to qualify you for a loan, but to sustain the repayments until the very end. One missed payment can snowball into a very large debt because of late charges and rolled interests.
If necessary, you’d want to take a second job, at least while the loan is in place, so you won’t struggle with repayments and the chances of needing to borrow again would be very minimal.
How long would it take for me to pay off the loan?
One other important question to ask yourself is how long you would have to spend in paying off the loan in full. As a general rule, the longer the loan stands, the more expensive it will be for you, because there’s also more time for it to gain more interests. Meanwhile, a loan with a shorter duration might require you to pay higher monthly instalments, but it could give you the most savings as well.
Do I have other financial obligations?
Of course, you’ll also have to make room for other expenses that may arise. You definitely have bills and utilities to pay, ask yourself if taking a loan can affect your repayments to them. If it can, it’s either you have to reconsider or make adjustments to your monthly budget to balance the bills and the loan payments.
It could be very financially dangerous for you if the budget is very tight. If making loan repayments means you’re going to be late on other bills, this can endanger your credit score. You might also have a hard time catching up with all of the repayments and end up getting a new loan just to tide you over.
Can I sustain the repayments?
It’s not just a question of whether you can afford the loan repayments, but if you are ready for this big commitment. Every month, you need to allocate for your loan repayments, which is not a very easy thing to do.
You may need to have to sacrifice a few things, for example, your wants, in order to keep up with your instalments. Unless you’re financially and mentally ready for this, you need to think twice if it’s worth getting a loan right now.
What is the effect on my credit?
Taking out any kind of loan will have to reflect on your credit file, and your performance on your repayments will have a significant impact on your credit score. If you have bad credit already, beware, because it can further pull your score down if you miss or default on your payments. If you’re decided you really need the loan, take this as a good opportunity to rebuild your score.