It’s not always easy to know if you’re making the right financial decisions. It can be difficult trying to figure out when to borrow money and when to simply save up. Before you take out your next loan, here are 5 questions to ask both yourself and the loan officer before signing on the dotted line.
1. How Much Can I Afford?
It’s important to know your finances before taking out a loan. You need to know how much additional income you have each month after paying for all of your monthly necessities. If you’re not sure, make a list of all of your monthly bills, like rent, utilities, cable, etc. Then, make a list of your monthly expenses, like how much you spend on groceries, gas, entertainment, etc. The amount left over after paying for your bills and your expenses is a good starting point to use in determining how much money you could afford to pay towards a loan payment each month.
2. Do I Really Need the Loan?
Saving is always better than borrowing. Before taking out a loan, ask yourself if you really need this loan, or if you could achieve the same ends by saving up over time. Remember that borrowing always comes with the cost of interest, while saving up is free and only requires patience on the part of the borrower.
3. What Are the Loan Details?
Talk to a loan officer and get some information about the type of loan you’re considering. What would the monthly payment be, and is that an amount you can afford each month? What would be the interest rate on the loan, and are there any upfront fees? Are there any prepayment penalties for paying off the balance of the loan early? Sometimes understanding these details will help you decide whether or not a loan is the best option for you. You may realize that the type of loan you want is way more than you can afford, or you may discover it’s not much at all and taking out a loan is completely affordable.
4. How Long Will it Take to Pay Off?
Sometimes it seems like borrowing money is the best way to get what we want now, but you may change your mind after you figure out how long you’ll be paying on the debt. You may realize that building a new custom deck in your back yard is not worth having a monthly payment for the next ten years. Then again, borrowing money for a home improvement project could be a great investment and may improve your home’s value. Not to mention you would get to use the deck for those ten years, so you may determine that taking out a loan for a deck could be a good option.
5. Does It Make Financial Sense?
Determine if borrowing this money is going to be a smart financial move for you. Consider how much interest you’ll pay over the life of the loan, and decide if that amount makes this loan worth pursuing.
The most important thing to do regarding all financial decisions is to know what you’re considering. Read the details of the loan documents, know what you can afford, and decide if getting a loan makes financial sense to you.