People need money for different purposes and goals, and sometimes being short on money can cause distress and waste opportunities. Not everyone has emergency savings and debtless bank accounts, most people need to borrow money at some point in their lives.
Loans are being taken out constantly to cover urgent bills and consolidate their accounts. Taking out a loan has always been a double-edged weapon; it could turn your life around for the better or the worse depending on how you plan your decisions.
There are some tricks that you should be aware of before you apply for a loan. We’ll cover the best 3 tips that could help you understand the bigger picture.
1. Identifying the Reasons
The first important step before taking out a loan is defining the reasons that made you want to take it in the first place. You need to always leave applying for a loan, especially if it’s a big one, as your last option.
It’s normal and quite common for people to take out loans when their back is against the wall as they have no other option, so make sure that you’ve exhausted all options before you decide to take out a loan. Look for the loan shop that gives you flexible choices and keeps you in the clear about its conditions.
Don’t approach a vehicle loan in the same manner that you’d approach an emergency loan, use the free time you have to see if you can get a better deal or different type of loan when the matter is non-urgent.
2. Not Overestimating Ability to Repay
A loan may seem quite lucrative when you need the money, but you need to understand that appearance can be deceiving. Just because the installments are not more than your monthly income, doesn’t mean that you can handle it.
The expert’s opinion is that car loan installment shouldn’t exceed 15% of your monthly net income while personal loans shouldn’t exceed 10%. You should be extra careful not to use up more than half of your salary to be able to repay the loan. In today’s world, it’s quite easy to take out a loan and also easy to find yourself drowning in debt.
3. Be Aware of Long Tenure
Always choose the shortest tenure if you have the ability to do so. It may look tempting to take a longer tenure as the installments would be much lower than shorter tenures, however, the interest rates can shoot up and accumulate easily.
A 10-year loan would have half the interest of a 20-year loan. If you’re back is to the wall and you have to take a longer tenure, then your best bet would be to gradually increase the value of the installments as you become more able to pay them over time.
Taking out a loan can look tempting when you’re in desperate need of money, but don’t rush to make a decision under pressure. You should research your options and try to look at the bigger picture before doing so.