There are times we get stuck in life and need some financial assistance; a loan can be a life saver in such circumstances. However you have to be careful not jump into one carelessly. You need to do some calculations and weigh the pros and cons before taking a loan! Here are five important things you should consider before taking a loan:
- Ask the what, why and how questions
Here you have to ask yourself what you need the loan for. Why do you need it? Is it for a want or need? You have to be certain that what you need the loan for is worth the risk and not for something you’ll do just fine without. Ask yourself how you intend to spend the loan? You surely must have a plan as to how to judiciously put it to use. Answering these questions will guide you further on the type of loan you should apply for. Is it, a mortgage loan, equity loan, personal loan student loan, short term or long term?
- The interest rate and length of the loan
It is very important that you consider the interest rate and length of the loan. These are what determine how much you’ll eventually pay to the bank at the end. Get conversant with the prevailing interests rates. You can even negotiate the interest rate with the institution. Find out the periods at which your installments become due and beware of what is called a ‘prepayment penalty’; an extra fee charged if you pay your loan too early. The interest rate can influence the type of loan you should take as some, like mortgage loans, normally have low interest rates and others such as personal loans have higher rates.
- Do you have a security?
You have to consider if you have a security or collateral, should you become unable to repay the loan. Banks are less likely to give loans without security. Something has to stand against you. The security could be important documentsor valuables that the bank will have to hold till you payoff.The security helps to lower the interest rate. Inmost cases properties are used as security. In a mortgage, the acquired property is used as the collateral by default, but in others you may have to produce one. While a business loan has the assets of the business as its collateral.Though in a personal loan there may not be need for a security what is a penalty charge which may be an extra interest fee.
- What is your credit score?
This involves you asking yourself if you have the capacity to pay back your loan, or make installmental payments as at when due? Have you crunched the numbers up? Do they add up to a positive credit score? A good credit score greatly improves your chances of securing a loan. The score comes from you previous history with loans or other credit facilities that you have taken. A poor one reduces your chances of getting not just a loan or mortgages nut also your work life or promotional opportunities in some industries like financial, public, regulatory bodies etc. excessive or impulsive borrowing can affect your credit score. It doesn’t speak well of someone who is financially healthy. Banks prefer to deal with financially stable individuals.
- Other alternatives
In the quest for financial assistance, have you should consider other alternative source of the loan like a credit union, a thrift society if you belong to one and other financial houses that give loans. They offer lower interest rates that you may be able to easily discharge.
In conclusion, you should pay careful attention to these considerations to help you make good decisions in this wise. Taking a loan can help you get out of a financial situation in the short term but you should also consider its long term implication. Nevertheless, the above considerations are good guides toward the decision whichever way.