Most people have a need for credit at some point in their lives. Loans can help to pay for large purchases such as car repairs or home improvements. However, if you are thinking of applying for a loan, there are several things that you need to think about.
Understanding some facts about borrowing money helps you to make better decisions. This is important as taking out a loan and using credit cards can have a negative impact on your life, if you are not careful. Here are 8 truths about loans that can help you to improve your understanding.
Borrowing is not always bad
You should not necessarily shy away from borrowing money. It can help you to purchase items that you cannot afford to pay for all at once, such as a new car. However, it’s important that you only borrow what you can afford to repay. You should also try and only apply for loans to purchase items that will appreciate in value or that will hold their value.
Loans are not a simple finance fix
Despite the fact that borrowing is not necessarily bad, it should never be treated as a quick fix. This means that you should only ever borrow money when there is no other option and you should only ever borrow as much as you need.
You also need to make sure that you have a budget in place so that you know you can afford to make repayments. Remember to take into account all of your expenditure, so that you can continue to live without financial nightmares when you start to make loan repayments.
Taking out a loan requires planning
The best way to get a good deal on a loan is to plan ahead. If you know that you have a large expense coming up in the future, you should start planning to borrow money straight away, if this is the only way of dealing with the expense.
Doing this means that you have time to consider all the available options. You are not forced into making bad decisions because you have a limited amount of time.
Not all loans are equal
There are many different loan options available. They all have different interest rates, costs and potential restrictions. For this reason, it’s important to carry out comprehensive research. This should include checking interest rates and determining if there are any other costs involved, such as compulsory insurance to be purchased.
You also need to find out if there are any restrictions in place. For instance, you may find that a loan has early repayment penalties attached to it. This means that you may not be able to pay off the loan as soon as you can and avoid paying as much interest as possible.
Your bank is not necessarily the best lender
It can be tempting to simply apply for a loan from the bank that you normally use. This is understandable as you are used to dealing with them. However, it’s not always the best idea.
You should take time to examine all the loan options that are available. This helps you to make sure that you choose the best borrowing choice for your circumstances.
Asking friends for a loan is not a good idea
Often, when people need extra money, they consider borrowing from friends. One of the main reasons for this is that friends often charge no interest. They may also be a little more relaxed when it comes to making payments on time.
However, this borrowing option is not normally a good idea. This is because it can put a serious strain on the friendship. For instance, if you borrow money from a friend and then struggle making repayments, you may end up arguing. Alternatively, the friend may encounter unexpected financial hardship which means that they need the money back earlier than expected.
Making minimum repayments is a must
If you take out a loan, or other form of credit, you have to make sure that you pay at least the minimum amount each month. If you fail to make these payments, you can quickly get into financial trouble. You can also cause damage to your credit rating.
If you know that you are going to struggle to meet your repayments, you should contact the loan provider. They may be able to adjust your repayment arrangements. It’s always better to do this instead of ignoring the situation and ending up with even more problems.
Repaying quickly is a good idea
If you borrow money, you should do what you can to pay off the debt as soon as possible. Doing this means that you can avoid paying more interest than is necessary. If you have any spare cash, put it towards paying off your loans. It often helps to start by paying off the smallest debt first. As each loan is paid off, you have more money to put towards your remaining debt.
When you are thinking about borrowing money, you need to have a good understanding of the process. This includes considering as many different lender options as possible. You should look at interest rates and associated costs and restrictions.
You also need to realistically determine how much you need to borrow as well as making sure that you can afford to make the repayments. This is important as you do not want to take on any more debt than you can afford.
Once you have a loan in place, you should ensure that you make at least the minimum repayment each month. Doing so means that you will not cause financial issues for yourself. If you have any additional money available, you should put it towards paying off your debt as quickly as possible.
These truths about loans should help you to choose the right borrowing options for your situation. They should also help to make sure that you deal with debt sensibly and do not start to struggle.
Kelly Dawson says
Thank you for this informative content, Pauline! Before making a decision to get a loan, these insights you’ve mentioned should be carefully taken into consideration. Though I would recommend to pay loans in advance if possible and pay it on time. This way, credit scores won’t be affected negatively. Cheers!
Platinum Accounting says
Loans are a liability and it takes so much time to understand this. Thank you for elaborated it so well. Every factor is important and giving a clear logic on why I am saying this. Well done!
Christian Alcantara says
A lot of people who are in need of money goes straight to getting a loan, although you can’t really blame them since it’s the upfront way of getting money, this is quite the good read since it gives an insight on how getting a loan work and what you should know before getting one, since it’s not a get out of jail free card since you would still be owing money.
Very helpful points to consider! I definitely agree with planning in advance as much as possible.
When looking to buy a house, I found it helpful to shop at several different banks and lenders to find the best interest rate plus lowest threshold for insurance.
Don’t be afraid to shop around for the best deal and to say no to a lender!