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Friday, September 9, 2016

Eight essential checks to make before you borrow money

I am really opposed to taking out loans. Debt is bad and can cause a bad financial situation to get from bad to worse. Dave Ramsey and his followers talk tremendously about how much debt causes problems in life, and people work so hard to pay off debt that they've accumulated. I rarely ever think that taking out a loan is a good idea- if you can't afford something, don't buy it, don't spend money on it. Save up for things instead of borrowing money to pay for them. And if your income does not meet your expenses, either raise your income or lower your expenses or both, don't take out loans to cover your expenses because then it will just be a cycle of more and more financial issues...
But, if you have decided that you have no other options but to take out a loan, please consider these issues brought up in this post by a reader, Ben. 

The internet has allowed people who need to borrow money to do it easily, either for a treat such as a holiday or new conservatory or for more pressing concerns such as bills and debts. But before wading straight into a borrowing agreement that could be crippling it is worth carrying out a few simple checks and asking responsible questions, such as these:


What’s my credit rating
A credit rating, a concept shared by individuals and states, is actually fairly loose in that it’s a simple estimate based on limited knowledge and it can even vary across credit rating companies. That said, lenders will take a look – so gaining your rating might give you an idea of what borrowing is realistic and what is fanciful.

Secured v unsecured
There are generally two types of loan; an unsecured loan is not tied to any type of collateral, while a ‘secured loan' relies upon the borrower using collateral such as a home or car to gain a higher amount of money, with the understanding they will lose that collateral if the debt is not paid. As AvantCredit explains, “unsecured loans are for smaller amounts than secured loans and may carry a higher interest rate.. Therefore, ask yourself which loan type you would be most comfortable with, and if you can afford to lose the items you are putting up.

Should I contact my bank first?
If you’re a trusted customer of a bank you might be able to gain more favourable rates than just going in as a new customer. Also, if you’re paying a bill, have you spoken to the utility companies/credit card companies to check whether you can spread out the costs of payment?

Will you be able to stop yourself spending?
If you’ve got an injection of borrowed money into your account, what will stop you spending it on other things rather than the specific reason you are borrowing?

What is the interest rate?
These vary wildly across loan companies, from a few percent up to devastating and lethal interest rates that ruin people. We’ve gladly dropped from the 5,000% APR of the bad old days of 2013, but short-term lenders can still charge in excess of 1,500%. Also, be wary of overdraft interest rates.

Can I afford it?
If you’re planning on taking out a loan, be realistic: this burst of money into your account will be no good if, down the line, you can’t afford to pay it back. Reframe it this way; could you pay back the monthly amount if you didn’t have the loan in place?

Is there another way?
If you need to borrow money for a specific purpose such as a bill, there might be other options. Have you approached friends or family? Could you sell something or work more to raise money?

What’s next?
Now that you’ve panicked about how to fix your monetary despair, what steps will you take to make sure that such drastic measures are not needed in the future? Will you be more diligent with your spending? Will you write in your diary when to expect bills, and save up so that it can be paid easily? Will you cut down on luxuries and unnecessary purchases? Or will you be reading this piece again in a few months’ time?

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