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Thanks to fellow S&S reader, Hope, for today’s post. Before you consider taking out a loan, check out her tips!

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4 Things To Consider Before Taking Out A Loan

Thousands of us take out a loan every day, but care needs to be taken. Without careful forethought, many people find themselves in a difficult financial situation, owing lenders more money that they can pay back.

If you’re thinking about getting a loan in the near future, consider the following before you do.

1. Why take out a loan in the first place?

There are good reasons for taking out a loan. If it’s going towards a long-term investment, such as your education or an investment property, then a loan can be considered ‘worth it.’ Consolidating previous debts into a lower-interest loan is also a good idea.

On the other hand, if you’re thinking about purchasing a loan for a vacation or to help you pay your bills, then no, a loan is not the right answer. You need to balance your spending to make sure you can cover all your bills and still save a little for fun spending, like that vacation.

2. Where are you looking for your loan?

A loan isn’t always difficult to come by, but you should shop around.

If going to a bank, shop around as interest rates can differ. The same applies to any other loan provider, though banks often offer a fairer rate of interest to stay competitive.

However, the lowest rates can often be found at your nearest credit union, alongside reduced fees and other benefits that banks don’t offer.

If you find yourself getting turned down for a loan, private money loans are also an option from private lenders. These are all viable options, provided you are able to make the monthly payments stipulated.

However, it’s in your best interest to avoid quick payday loans, as, despite the promise of fast payments into your bank, there is often a huge amount of interest to pay. You should also avoid any loan company from unknown or unaccredited sources, as you may end up getting ripped off in the process.

3. Are there hidden fees?

Always read the small print on the loan contract before signing. You need to know what you’re getting yourself into, as there may be fees that haven’t been properly explained to you, or in some cases, not explained at all.

These include a ‘missed payment fee’ which is charged when you miss your payment date, an ‘origination fee’ which is a charge for setting up the loan, an ‘extension fee’ which is charged should you extend the terms of your agreement, and (worst of all!) an ‘early repayment penalty’ which is used to cover lost interest should you pay off your loan early.

Check with your loan provider beforehand and directly ask them to clarify any fees that are associated with the loan you are considering.

4. Are there alternatives to taking out a loan?

And before you take out a loan, ask yourself one more time if there’s any other alternative. There may be other options that are more financially viable.

For example, could you borrow from friends and family at a lower interest rate? Or even no interest? If you are in need of extra money quickly, consider selling some of your inessential personal items to raise funds. A zero or low-interest credit card may be a viable alternative to a loan, provided you have the means to make your payments on time. If you are struggling, there may be benefits you may be entitled to from your local welfare department. And then, if you are looking for a short-term loan for a luxury item, start a saving plan for what you want instead.

You see, while a loan is a good idea in some cases, you don’t want to tie yourself down to a financial burden when other options may be available.

Take out a loan by all means – it can be a good idea – but do your research before you do. This way, you are less likely to get yourself tied down with something that could be hanging over your head for many years to come. Take care, and thanks for reading.