Have you ever been in a situation were you wish to buy a car, build a house, rent an apartment, buy furniture and other gadgets etc, but do not have that cash and taking a loan is totally out of it, because of fear of defaulting in payment?
Yes, I know you have been down that road quite a number of times because we all have reasons to need money - be it genuine and not so genuine. Also, no ones wants to be known as a Debtor, hence, people prefer to manage what they have to accomplish what they want to accomplish.
Truth is that there is perfectly nothing wrong in taking a loan. In fact, taking a loan could help you get to your planned destination faster than if you were to wait to save to that amount you need. However, there are certain things you need to consider before taking a loan so as to make it worthwhile.
1. Can your current income stream comfortably support your loan payback?
This is the most important factor to consider. Will you be able to conveniently repay the loan periodically without it adversely affecting your life style? If your answer is Yes, then you are probably safe but you need to factor in eventualities as no one knows the future.
2. Are the interests and payback periods favourable?
Out of desperation, some people fail to factor these things in and end up getting their fingers burnt. Since borrowing is high risk especially in these parts most creditors put up stringent policies which are usually to the disadvantage of the potential debtor. You need to factor in the interest rates, which in turn affects what you will paying on a periodic basis. Also the payback duration could make even a simple looking loan to look like a mountain to climb simply because it does not offer much flexibility in repayment.
3. Why are you borrowing?
If you must borrow, what would be the reason for that? A rule of thumb before taking a loan is this: if you must take a loan let it be for the purpose of investment or acquiring assets. This is because investments and assets appreciate in value whereas liabilities do not. For instance, investing in a business now could mean that years down the line, it gets to repay itself. Buying a land today, means that tomorrow its value could even double which is a plus for you. Compare these instances to a person who borrows money for a party. Once it is over, the fun ends but there is still that debt to be paid.
4. Can you do without taking the loan?
Except on the basis of buying a property, taking a mortgage, starting up a business, paying tuition fees etc, which are time bound activities, do you really need to take the loan? Like I mentioned in (1) above, if your income level can comfortably repay the loan then you can proceed to take it. But if you do not fit in any of the listed, then it is not advisable to take one.
5. Are you prudent in your expenses?
Whenever you take a loan, you have more money at your disposal which could be quite tempting. There is a tendency to spend it on things that you never budgeted for. Remember that for every expense you make outside your initial loan plan, you equally have less to spend on your plan. This could make the loan lose its effectiveness and make it seem like you shouldn't have requested for it in the first place.
Taking a loan is both rewarding and equally risky. If things go your way, you look back and smile at that decision you took. But if it fails to go your way, you have regrets.
Life is full of risks and sometimes, you just have to plunge into the deep in order to move ahead.
Enjoy the rest of your day.
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