There are many occasions in life when you might need to take out a loan. Most commonly, you might be buying a property of your own, or you could be starting a business and you need some initial capital to get it started. Whatever the reason for your need for a loan, you need to understand how you can best approach the entire situation. By having a strong understanding of this, you are much more likely to end up in a good financial position. You will also find that you have much less stress around the whole topic.
In this post, we will therefore look at some of the main considerations you should bear in mind, and actions you should take, when you are taking out a loan. As long as you have thought about the following, you will find that you are in a much better psychological and financial standing.
Know Your Reason
It might sound elementary, but you do really need to know why you are taking out a loan - before you start applying for it. As we have seen already, there are a few common reasons people take out loans, with the most common being a mortgage for a home, or a business loan for a startup. You might just need a credit union personal loan for an unexpected medical expense that has come up in your life. Whatever it is, you need to have a specific reason, because it protects you against one of the most common problems that can occur in the world of loans: taking out a loan just to get by.
If you are in a position where you are not able to afford your expenses, and you want to get a loan in order to afford rent and so on, that should set off alarm bells in your head. Ideally, you will step away from the idea of taking out a loan, and instead seek out financial help. In most cases, declaring bankruptcy is a better option than getting deeper into debt. At the very least, you should first seek to gain financial help from the people around you, as often that is enough to get out of a tricky situation.
As long as you know your reason, and it is for a specific cause, you are more likely to be in a good position to actually take out a loan, so don’t overlook this vital part of the process.
Calculate Your Needs
Once you are very clear on the specific reason for taking out a loan, you need to make sure that you can work out exactly how much money you actually need to borrow. Those who don’t work this out fully are less likely to get the loan in the first place, because most lenders want to know exactly how the money will be spent, and might accidentally borrow too much, thereby meaning that they are in considerable debt later on in life.
So, spend as much time as you need to figure out the specific costs of whatever you are borrowing for. It’s okay to borrow slightly above that - most projects do end up costing more than you hoped - but don’t go too far. Once you know your specific needs, you can start to look at which loans will suit you best.
Choose The Right Loan For Your Purpose
Sometimes, people are tempted to take out a loan that is advertised for a different purpose than the one they are actually going to use it for. There are many reasons a person might attempt this. An interest rate might be attractive, and you could find yourself thinking that you will save a lot of money this way. Or you might just be trying to claim more than you would be able to otherwise. But it’s a very bad idea to do this, for a few reasons.
First of all, and most importantly, if you don’t check and double-check what you are doing here, you might accidentally break the law. Often, it is necessary to actually use a loan for the intended purpose. Secondly, you are going to need to make sure that you are using a provider who specialises in what you are doing. So if you are buying property, an hdb housing loan is going to serve you so much better than a personal loan for those purposes. If you are starting a business, a business loan will always be best.
Choose the right loan for your specific purpose to avoid getting into trouble with the law, to keep your finances intact, and to reduce exposure to risk.
Check The Small Print
Whatever kind of loan you do take out, you should endeavour to always check the small print as carefully as you can. If you fail to do this, it can prove to be devastating for your future financial position. You never know what might be hiding away at the bottom of the paperwork until you actually check, so make sure that you are doing that before you sign your name on the dotted line.
If you think you might need help with this, it is not a bad idea to hire a legal expert to give you a hand. That way, you can make sure that you are not being led down a path you would rather not take. For the modest fee of a paralegal, you could end up saving a lot of money further down the line.
Set Out Your Repayment Plan
At the very start of the loan, you should make sure that you have a clear idea of how you are actually going to be able to pay it all back. You should draw up a repayment plan as soon as possible, and before you actually sign for the loan itself. Often, your loan provider will want to see this anyway - but even if they don’t, it’s a wise move to make for yourself, so that you can make sure you are going to be able to repay whatever you borrow. If there is any doubt at all about paying it back, don’t do it, and seek alternatives instead.