Loans can help you afford major purchases that make you more financially stable. Before you take out a loan, though, you should consider these 4 factors to determine whether it’s really beneficial.
How Much Can You Afford to Borrow?
Since the Great Recession, most lenders are cautious about lending money to people who can’t repay it. It’s still important for you to take a realistic look at your finances to decide how much money you can really afford to borrow.
The loan’s term will have a big impact on this. A person earning $50,000 obviously can’t repay a $150,000 mortgage in five years. But 20 or 30 years might work.
If you have a hard time staying realistic, talk to an independent financial advisor for no-nonsense information about how much you can afford to borrow.
How Long Will it Take to Repay the Loan?
Having a long-term doesn’t always make a loan easier to repay. Perhaps you can tolerate $1,000 payments for a few months. That doesn’t mean you can continue to make those payments for several years.
Think about how long you can withstand making your loan payments. Don’t assume that you’ll get a huge raise in the near future. It’s best to play it safe by only measuring payment viability by how much you earn now.
How Much Interest Will You Pay?
Interest rates have a huge influence on how much money you will repay by the end of the loan. Even small changes can make big differences. Let’s say you borrow $150,000 to buy a home. You plan to repay it over 30 years with nine percent interest. By the end of the loan’s term, you will have spent $434,494.80.
If the interest rate on that same loan were lowered to six percent, you would repay a total of 323,758.80. You save over $100,000 just by getting a lower interest rate.
That proves how important it is for you to explore all of your options before you accept a loan. Even just a couple percentage points can change your repayment plan significantly.
Will You Get Good Services From the Lender?
Do some research before you accept a loan from any lender. Some companies offer better customer services than others. You don’t want to get stuck paying a 30-year mortgage to a company that gives you terrible customer service.
It’s one thing to repay a portion of your loan every month. It’s another thing to send money to a company you have grown to despise.
What other things should people consider before taking out loans? Have you ever regretted taking a loan for a small or major purchase?