What to Ask Yourself Before Taking Out a Loan
So, you’re looking for access to extra funds. Maybe you want to consolidate multiple higher-interest debts. Or you could be looking to fund a small business. Or possibly your home is due for a remodel. There are about as many reasons for taking out a loan as there are lenders happy to oblige. In today’s economy, it’s relatively easy to get a loan.
But sometimes it’s too easy.
Remember that lenders make money on your loan. They’re not just doling out funds for fun. And they’re not necessarily looking out for your best interests. The key is that you are borrowing – which, by definition, means you have to give it back. And the catch in this kind of borrowing is that you have to give it back with interest.
If you use your loan prudently, it can help you achieve a number of goals to take control of your finances. But before you sign on any dotted lines – indeed, before you even sit down with a financial lender – take a moment to consider your answers to a few important questions.
1. Do I really need this money?
First and foremost, be honest with yourself about whether you can make do without the added funds. If you realize that you absolutely need extra money, take it a step further: Ask yourself if you really need this as a loan. If you put in a few more hours at work or cut out a couple expenditures per week, could you reach your goal by saving rather than borrowing?
2. Do I have any collateral?
When you’re taking out a loan, your lender will want some reassurance that they’ll see their money again. If you have good credit, lenders will often offer an unsecured loan based on your creditworthiness. But even if your credit score is less-than-stellar, you can use the value of your car or your home to back a secured loan.
3. What is this loan going toward?
Be sure that your loan will fill a very specific need. It’s easier to make a plan – and stick to it – if you have a targeted goal. If you’re investing in home improvement, for example, you will be able to see where your money is going – which might make the repayment period a little less unpleasant.
4. How much do I need to borrow?
Say you’ve decided this loan is vital for your kitchen remodel. Be sure to get all the estimates from contractors in advance so you can decide exactly how much you need to borrow before turning to your lender. And don’t be tempted if your lender offers to extend you more credit than you need. Stick to your budget.
5. Can I afford the payments?
Keep in mind that, while you’ll have access to extra money, borrowing won’t solve your financial problems if you don’t have a plan to pay it back. In fact, it might even compound the difficulty you currently face. And remember that your loan repayment amount will depend on how long it takes you to pay it off – the longer it takes, the more interest you’ll pay over the long term.
Whether you’ve taken out several loans or you’re brand new to the lending game, it’s smart to assess your individual situation. Have you addressed these questions but still have some lingering unease? Reach out to the friendly folks at American Credit Foundation to figure out what else you need to know before entering into a lending contract.