Loans are financial commitments; whether it’s a short-term loan, a personal loan, a student loan or a mortgage. For this reason, you must have a clear method of how you will use the money and how you will refund it.
While many financial experts believe that it’s normal for the borrower to be nervous while borrowing a loan, you shouldn’t let the anxiety stop you from asking yourself some crucial questions regarding the credit you’re taking.
What you learn from answering those questions might surprise you, and even make you change your mind for the better.
Discussed below are the top 5 questions worth asking before you commit yourself to any loan:
This should be a personal decision. In many times, your lender may not fully understand your specific needs and may therefore not give you the best advice. Andrew Josuweit (@josablack), the Ex-CEO of StudentLoanHero.Com advices borrowers to only get the loan amounts which they can repay comfortably. “It’s tempting to ask for more money especially when the lender is willing to give out a substantial amount. You should, however, ensure that you can repay the loan and the interest with ease,” Says Andrew.
The main disadvantage of taking out a large amount of loan is that you may end up using the excess cash. By doing so, the chances are high that you will soon take another loan to repay the first one, and end up in a long debt chain where you cannot escape easily. Also, you should avoid taking a lesser amount of loan compared to the amount you need.
If you take a personal loan, you can make biweekly payments or monthly payment as agreed with your lender. Don’t take a loan if you don’t have a clear plan of how you will return the borrowed money.
If you are employed, make sure that you are not at the risk of losing your job because you might encounter challenges. The income you get should be enough to help you to repay the loan comfortably.
More to your regular sources of income, you can look for alternative methods of earning money. For instance, you can search for a side hustle or job that will add you extra cash to settle the loan.
If you need a loan to settle an emergency, don’t be overwhelmed or anxious to forget asking about the terms and conditions. You should understand that all financial institutions do not provide the same services. The interests are also not the same. For this reason, take your time and make comparisons of the available lenders.
Don’t agree to sign for any loan agreement if you still have unanswered questions in your mind. The loan may have hidden charges making it hard for you to repay it. Take the loan if you are comfortable with all its requirements.
Lenders make money from the payment of interests, and that’s why some of them are against the prepayments. Most prepayment penalties are usually associated with mortgages and other installment loans which need collateral. If you are planning to make a prepayment, don’t hesitate to confirm if your lender charges a prepayment penalty. Thankfully, many financial institutions do not allow these penalties as stated by Kimberly Palmer (@KimberlyPalmer), a personal finance expert at NerdWallet. “The prepayments payments are now rare to see nowadays because they are termed illegal by most government-backed loans.”
Most installment loans tend to be secured, meaning that the borrower must provide a top up the high price as the security. The primary examples of collateral loans are car loans and house loans.
So, if you need those types of loans, be sure that you have some collateral you can give out. It will save you the last minute disappointment should you find out that you needed security and you don’t have one.
Additionally, be informed that the financial institution will come for your collateral if you fail to pay. Ask your lender about everything you need to know so that you can have a calm loan repayment period.
Taking any loan is a tough decision. As Rachel Cruze (@RachelCruze) tells us, “debts are hard to pay, and no loan comes at the right time. The borrowing comes in handy during the right time, but it requires proper planning.”
However, as always, understand the terms and conditions of the loan before you apply. Make sure that you have a good plan of how you will use the cash and how you will repay it. By so doing, your loan will leave you in a better situation.
Andrew Josuweit (@josablack) is the Ex-CEO and founder of StudentLoanHero.Com in New York City. A coffee lover and a charming presence who enjoys personal finance, economics, fitness and customer experience.
Rachel Cruze (@RachelCruze) is the leading New York Times best-selling author who intends to help everyone become better with money. She is also a top personal finance expert, and the host of popular The Rachel Cruze Show.
Kimberly Palmer (@KimberlyPalmer), a personal finance expert at NerdWallet. Kim is also a senior editor for the US News&World Report.
Raven’s genuine interest in behavioural economics and her expertise in psychology, acquired during her Master of Professional Studies (MPS) in Applied Behavioral Economics at Dyson Cornell College of Business make her the perfect candidate to approach all the personal finance topics through the perspective of an individual’s psychology.