When you are low on a financial budget and in an emergent situation, you may think of taking a loan to make up with your growing expenses. As much as you want to avoid having debts, getting a loan is a personal decision that can either improve your life or put you at risk. Of course, if you owe money that you cannot repay, it will ruin your credit, you’ll get higher interest rates, and suffer other troubles.
But, it should not discourage you from taking a loan. It is about how you prioritize your needs and plan your financial situation. If you are wondering if loans can really help you, we have outlined the reasons below why it is a good choice.
When you should take a loan?
There are several situations that loan can be your friend. It can help you make ends meet and offer more financial opportunities that can uplift your life. With analysis and strategic planning, it can be your source of relief.
· If a purchase is practical and essential
Know your purpose why you want to get a loan. It may be tempting at first but take time to realize if it’s really a necessity. A common mistake that people commit is living beyond their means, not having a proper understanding of the difference between needs and wants.
If you are in a situation where you badly need to purchase something, for instance, you are driving to work, then a car is essential. It’s a basic necessity. If your purpose will give you long-term benefits, getting a loan is a good choice.
· If you have a good credit score
Bad credit history can hurt your finances. Most lenders like Bugis Credit use your credit score to determine the credit risk of repaying the loan. With good credit, you can apply and qualify for lower-interest loans. On the other hand, a poor credit (below 720) can cost you high-interest rates which make you pay more over the life of the loan. But, not because you have a solid credit score and you are eligible for affordable loans, you will take it lightly. It involves proper management and responsibility to make payments.
· If you are comfortable that you can afford it
This is the most obvious reason to take a loan. This may seem redundant to say but people often overlook that the amount of loan they are borrowing and the repayment to be made is high enough that they can’t afford it – especially if they are desperate.
Don’t be easily tempted to owe a large amount, thinking that you can find a way or solution to make ends meet. The basic rule is to borrow only what you can repay. Determine your source of income if it can suffice your financial worries. If possible, get a second job or a side gig to increase your income source and be able to deal with the upcoming financial stress.
· If a debt consolidation will not hurt you
If you think that you can afford the monthly payments and interest rates, you can use a personal loan for consolidating your debts. Based on your calculations, determine the amount of the loan and the affordability to repay it. If the figure shows that the cost of paying your debts has not lowered, you’re on the wrong side. However, if the rates lower the cost, you are in a winning situation.
When you should not take a loan?
Money is tempting, especially if you are in a desperate need. While this can help you financially, there are risks and pitfalls you need to know in order to avoid living a miserable life.
· If you have a poor credit
It’s true that you can get qualified for a loan despite having a poor credit score but, this does not assure you of a good financial condition. Instead, it will give you stress due to the right interest rates affected by your thin profile. Taking a personal loan with a bad credit history will just put you on the risk of a debt spiral and a debt trap. It does not matter if you qualify, the bottom line is how much you have to make for the monthly payment.
· If you making payments is a burden
Know your capacity. Going to borrow the maximum amount of cash wherein you qualify may seem a good idea but it is not a practical choice. You are putting yourself in a commitment of paying more. Make a smarter move by understanding your debt-to-income ratio and if you are able to make payments on time. Failing to meet the requirements will ruin your credit and bring you on negative consequences.
· If you still have heavy debts
If you don’t have a stable source of income and you take out a loan, it’s like jumping into a quicksand. Instead of getting afloat, you are just burying yourself deep in the debts. If you still have many payments to be made such as student loans, credit cards, mortgage, and other bills, borrowing additional money will do no good. If you can’t keep up with your current payments, why choose to add another one? You need to find a way to improve your life and cut your spending.
· If you want to splurge for less important things
Can’t get your eyes of the new clothes or craving to spend a vacation? Well, getting a loan to fund these less essential things is a bad idea. Instead of planning your trip to Hawaii, plan how can you convert your spare time into money. Instead of purchasing a brand-new car, try to pay for the repair costs. There is nothing wrong with being frugal, you can live a lucrative life later. Splurge and treat yourself at the right time. For now, that you are in a tight situation, saving for rainy days is the best option.
The Bottom Line
Taking out a loan is both risk and reward. This is a financial decision that requires a thorough understanding of your income and expenses and strategic planning on how you can pay down your debts. Focus on your needs and not on your wants. Know your purpose of borrowing money because when the monthly bills keep coming, there’s no rewind.