Taking on a loan or any form of debt is a decision that should never be made lightly. Under certain circumstances, however, it can help to provide you and your family with tremendous relief. If you are thinking about borrowing to take care of financial responsibility or purchase, ask yourself these five questions first to ensure you’re making the right choice:
1. What are the conditions and am I eligible?
Don’t go straight into researching the terms of different finance options until after you’ve checked out their eligibility requirements. Not everyone is eligible for finance, especially when you’re looking at fast loans. You’ll need to be of legal age and factors like citizenship and residency status can also be pre-requisites. You should also check what the annual income requirement is and whether being on government benefits affects your eligibility. If you meet the eligibility criteria, continue to the next questions.
2. Can I afford the repayments?
Knowing the interest rate of loan repayments is not enough to indicate whether or not it’s affordable. Consider the repayments in real-life terms, that is, in terms of your accessible income and items you value. A low-interest rate may sound attractive but if you don’t have a good idea of how soon you’ll be able to pay it back, it may cause you more struggle. Think about it, if a 4% interest rate costs you the same as your phone bill or your weekly groceries at a time when you’re struggling to keep up with these purchases, then the repayments are probably not worth the sacrifice.
3. Is the purchase worthwhile when interest is added?
This question is helpful for determining whether your new purchase is a necessity. Take a moment to calculate what the total amount of your purchase will be, including any interest, by the time you expect to pay it off. For example, an item that costs $1,000 upfront, could easily cost you up to $2,000 on a long-term payment plan over 12 or 24 months. Would you be willing to pay that price upfront if you could afford to do so? If your answer is a definite no, then you may want to reconsider the purchase.
4. How reliable is the lender?
It’s an unfortunate reality that most of those who fall prey to fraudulent lenders are usually vulnerable people who have been denied loans in the past. Always do your research and a credibility check-up on a lender before accepting a loan. There are accessible resources online on how to avoid loan scams and what to look out for to help you. Sometimes, reputable, not-for-profit loan companies will actually provide financial counseling and help, so if your lender falls into this category, be sure to take advantage,
5. Will this impact my life for the better?
Even if you have responded positively to all of the above, at the end of the day, your decision comes down to your quality of life. Is the item that you want to buy going to improve your life in a way that justifies the debt? Paying back a loan is a serious ongoing commitment that will cost you in interest rates and penalties if you miss a payment. It could be just a small price to pay if the purchase is going to help you with your work, your education, your health or improve your life in another way.
Take your time answering these questions and be patient with your research before you decide to buy or not. When it comes to your personal finances, the final choice should always be your own.