When we borrow money, we often do so under less than fortuitous circumstances.  Although loans can be a sign of doing well – of wanting to expand a business, invest in a new car, or extend your home – they’re more likely to be a reaction to monetary troubles.  The problem tends to be that you need more than you have, and this often causes people to make a rushed decision.

Unfortunately, this rarely ends well.  Borrowing money is a big deal, and not paying due care and attention usually results in an agreement that doesn’t suit either party.  Rather than proceeding with haste, you need to take your time to really think things over, considering your options from every possible angle.

To point you in the right direction, here are three things that you really ought to think about before taking out a loan.


#1:  Can You Afford It?

Most vitally of all, you need to consider whether you can afford to borrow.  Although many borrowers would reply that they couldn’t afford not to, this is a very important question, and it requires some serious thought.  Taking out a loan should never be a response to financial hardship; rather, it should be a way of securing funds that you know you’ll have access to in the future, but simply don’t have at the immediate time.  If you won’t be able to cover your repayments, don’t take one out – it will only end in heartache.

Taking Out a Loan: Three Things to Think About

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“I don’t want a loan heartache”.   An unwitting victim…bwahahhahahaa by bark, on Flickr.  This work is licensed under a Creative Commons Attribution 2.0 Generic License.


#2:  What Type of Loan Are You Looking For?

Many people are unfamiliar with the particular nuances of borrowing.  Although they have a rough idea of how loans work, they’re often unaware of how many different borrowing options are actually available to them.

Loans can be roughly split into two categories: secured and unsecured.  Secured loans often cost less, but they’re usually considered to be higher risk.  This is down to the way that they work.  Essentially, the lender’s risk is offset by a putative claim to something that belongs to you – usually your home and car – which means that if you default on your repayments, they can seize this asset in lieu of your debt.

Unsecured loans pose less risk to the borrower, as the price of defaulting is far less severe.  However, the risk posed to the lender must still be minimised as far as possible, and this is achieved through stringent credit checks and higher interest rates.  As a result, not everyone will be eligible for this type of loan.


#3:  How Flexible Are the Repayment Terms?

Another thing to weigh up is the repayment terms of any loans that you consider.  These can vary significantly from lender to lender, and it’s important to find an arrangement that suits you.  In particular, you’ll want to look out for those lenders who allow you to pay back your debts early, as doing so could significantly reduce the amount of interest that you’ll be expected to cover.


Is a loan really the right option for you?


Arnel Ariate is the webmaster of Money Soldiers.

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