4 Important Questions to Ask Before Borrowing Money

Before you go into borrowing money, first of all, ponder on these four(4) questions… Do you want to go into that loan, Are you borrowing money to pay for your education, buy a new car, or pay for an unexpected bill, a reliable source of credit is an important financial tool for many of us. However, without proper financial management, it’s easy for debts to build up and to quickly feel overwhelmed by your financial situation. That’s why, before you take out any loan or borrow any money – whether from your family or a bank – you should take a moment to stop and ask yourself these four important questions.

1. Is This Loan Necessary?

Always start with this question. It may seem simple, but you may find out on the long run that it is not that easy by weighing up the difference between want and need.

If the answer is “yes”, it is necessary, then ask further if it is something that you need immediately, or if it’s something that can be bought at a later date when you have had more time to adequately plan around it.

You don’t just rush down into borrowing money just because you felt something of “Want” like borrowing money to buy a car or for personal usage is really a bad idea when you don’t have a high-income stream, because, in the process of paying back, you may have to lower your living standards or even at some cases, this could cause school fee’s debt and keep your kids at home, borrowing money only when it is necessary is a key to keeping your living standards and have a free mind of rest.

2.  How Much is to be Repaid and How long?

If you go ahead and decide to take the loan, be very clear about how much is to be repaid. Some plans have varying repayment rates, whilst others will penalise you for missed repayments, adding extra costs onto your monthly rates – And this could be really bad, because you now have to may even more than what was bargained during the agreement, meaning it will take you a longer period to repay.

Once you know how much the repayments will be then make sure you take an honest look at your budget to be sure you can really afford it without compromising your standard of living or your savings and investment goals.

You should always aim to keep your debt-to-income ratio as low as possible, notwithstanding that some loans appear to have fantastic monthly repayments that are affordable and well within your budget, however, it may be because the loan is spread over a considerable period of time. But ask further If your financial situation changes – such as losing your job or going on maternity leave – will you still be able to make these repayments as scheduled? if not, then taking up that loan will be a very bad idea and i won’t recommend you do that.

3. Is The Interest Rate Obtainable?

This is another important point of consideration when it comes to borrowing money. Almost all loans come with an interest rate. This means that by the time you have finished paying them off, you will have paid back more than you borrowed.

Take time to look at the interest rate and ascertain whether is it adjustable or fixed, and shop around to make sure it is fair or that a better deal isn’t available elsewhere. For instance, If you are buying a product with a repayment plan – like a washing machine – then take a moment to ask if it is worth paying the interest for? or if you can afford to wait a few months and save up enough money to buy it outright, thereby saving yourself money in the long run.

4. What are the Consequences of a Failure to Repay Loans?

This is important especially when borrowing huge some of money. Always ask yourself what are the consequences you stand to face when you’re unable to repay. Will there be large scale consequences such as vehicle or property repossession, or will you be left with a mounting debt that you will never be able to pay off?

Keep in mind that with a poor credit history you may have a difficult time securing credit in the future, which can be problematic if you want to buy a house, or even if you want to renew your car insurance or change internet or utility providers. This is one of the major reasons why you should make a strategic repayment plan before borrowing money for anything.

Related: How Is a Loan Amortization Schedule Calculated?

Conclusion

Borrowing money isn’t a crime nor a bad idea, it only becomes a bad idea when borrowing money to take care of wants instead of needs. Nonetheless, make sure to borrow what you can afford to repay without selling any important asset that would have made you huge amount of money if not sold or use as loan collateral. If this article was helpful, kindly share a leave a comment for us!!!