When it comes to taking loans, there are all sorts of opinions on the topic. A lot of people say you should avoid loans to keep out of debt, while others think some borrowing is healthy. Regardless of your opinion, you will most likely have to take a loan at some point in your life. This means that you may need to know how to go about borrowing intelligently.
What does this mean, though? Well, essentially, by considering the suggestions below, you may be able to make yourself more aware regarding what you are getting yourself into. This can help you to avoid nasty traps, such as unmanageable debt, further down the line.
Understand the other options
In some situations, such as buying a house, a loan is inevitable. In other cases, it allows borrowers to adopt a buy now pay later mentality that can be potentially harmful. This is common with car loans, as consumers tend to think that taking a loan means it won’t be as costly as paying in cash. These consumers then eventually end up paying more through interest in the long term.
Therefore, you should consider all avenues available to you before taking a loan. The most basic option available to you is to wait until you have saved the funds yourself. Taking a small loan to extend your holiday sounds like a good idea initially, but pushing your trip back a little while and doing everything you’d planned without debt, would be much more satisfying.
If it’s a payday loan you’re seeking, however, investigate what grants are available to you. See if you can enlist some help from a family member to get you through the week. In this situation, a loan may hurt you more than it can help you, so it’s essential to know the alternatives.
Know what you need
To borrow intelligently, you should understand exactly how much you need. It may also help to know precisely when you will need it. This allows you to begin factoring a potential loan into your budget. Consider what you are going to use the money for before applying for your loan. For example, if it is a business loan, will you be using it to furnish your office? If so, what do you need to complete this? How much do you need to spend on technology?
Knowing what you need also allows you to calculate your repayment times, loans terms, and the potential deposit that you will require. While you are doing this, planning ensures that your goals are realistic and that this won’t be wasting your time.
What type of lender should you pick?
Depending on the calibre of loan you are requiring, you may have various options to choose from when it comes to selecting the lender for you. You can go through the big banks to get funded for most loans. However, when it comes to smaller loans, you could go through various private lenders or smaller banks too.
Different lenders offer different features and interest rates, so it may be worth shopping around to ensure you’re making the best choice. To be smart about this, in your planning phase, you should work out exactly what terms you require.
Do you need fixed or variable rates? What about lines of credit or a cash advance? How fast do you need the money? If it’s within 24 hours, you may need a personal loan, if you don’t have a time frame, going through a bank could be just fine.
How much can you afford?
Back to that concept of being realistic. Can you afford the loan you are seeking? Do you qualify based on credit? Do you have the right income to sustain a large loan? It is not necessarily the loan you have to afford, but rather the debt you will end up in. Some loans will also come with extra fees, known as the ‘lender’s mortgage insurance’ if you don’t have a deposit of 20%.
This is incredibly important; the intelligent borrower should recognise that there are hidden fees when it comes to loans. It is never merely the loan itself. If it is a home loan you are taking, keep in mind that there are extra costs associated with name transfers etc. If your loan is variable, you need to be prepared to afford increased rates.
Borrowing smartly means you understand the contract that you will be getting yourself into, and when to enter or walk away. Doing some thorough research on the loan you seek is far better than rushing into something you don’t fully understand. Of course, this is all just base information, if its a loan your need, put in the work now so that you are ready to manage your future debt.