Questions to ask before taking a Loan

Before borrowing money you should consider whether it is the right decision or not. Over the years we have been used to taking loans whenever we need to purchase. However, Loans are two-edged swords. Of course it makes your life easy, but you should consider how it will affect your finances.

Questions before borrowing
Ask questions before you borrow

Borrowing means that you have to pay back in a time frame. Does your financial position allow you? Ask yourself these basic questions before borrowing.

  • Do you really want to buy? – This is the most important question. Sometimes we are led in by advertisements to believe that the article we are buying is a necessity. You can delay most of the purchases till you have the cash. If you are motivated to buy then depend on your saving skills rather than a loan.
  • Can you make the repayment? – Before borrowing financial assessment is required. How much disposable income you have? You should never borrow if you will find it difficult to pay. Even if you can pay it should not drain you. So, be careful about the repayment plan you are getting into.
  • How soon can you be debt free? – Freedom from debt burden makes you stress free. You should always assess how soon you can be debt free i.e. how soon you can repay. Loan is not income but liability for you.
  • What if you face financial emergency? – Sometimes financial emergency takes away your ability to pay. It can be loss of pay, or a burglary. You need to take all things in consideration. Also, have you got enough leverage in your bank to pay back if emergency hits? Be very clear on these points before you take a loan.

Loans if unpaid can take happiness away from your lives. So, assess, re-assess and only if it is unavoidable take a loan. These are difficult time so more care is required.

 

How much Debt is Too Much

Having debt is not bad. Everybody has some debt. In may be in form of credit card balance, education loan, auto loan or mortgage. Having too much debt can really make life difficult. Imagine the bank call asking to pay your overdue amount. It feels bad, doesn’t it? So how do you avoid getting in the tangle of having too much debt? Just spend some time to add up the total debt you have. This number will tell you many things.

Calculating debt-income ratio can help you figure out whether you have too much debt. It is just comparing the debt you have to monthly earnings. Debt also is of two types: (1) The debt on which you make regular payments is the Good Debt and (2) The debt which has been overdue for a long period is the bad debt. You need to calculate two ratios, one including all debt and the other having just the bad debt. The ideal Total debt Vs Monthly income is 3:1 and Bad Debt Vs Monthly income is 10:1.

So, if you are having more than 10% payments monthly for your bad debt means that is too much.

Debt Should not Bind You
                                               Do not Lock Away Your Earnings

Consequences of too much debt are really damaging. Some of the important ones are:

  • Stress is the most damaging part of having too much debt. You are always under the pressure to pay. Believe me it is very bad for your physical and mental health.
  • Too much debt means you falter on your payments. Faltering on payments affects you credit score negatively, and it becomes difficult to get loans when you really need it.
  • You pay more interest to the lending company and this will keep on adding to your debt.

So what do you do? Here are a few tips:

  • Set up your debt limit. Do not let it be more than one third of what you earn.
  • Pay full credit card bills and be regular. Paying minimum payment only increases your debt load.
  • Make periodical review of how much debt you currently have.
  • If you are facing problems making payment, call the company to make changes in payment plan.
  • Never take new debts to pay off old ones. It is a vicious cycle.

Be careful with your debts and enjoy your life. It is much easier to do so with controls put on debt.

Dealing with emotional problems of debt

Loans are tricky business. If you don’t manage your income and debt payments right, chances are high that you would end up in some trouble. But, there is actually nothing wrong with this situation. The economy is undergoing through some problems, and a lot of fields are changing. This means that people have lost their earning power, but they are still required to spend a lot of money. If you are in debt and you feel like it has spun out of control, you should remember that it could have happened to any body.

Debt Counselling

Acceptance is the first step towards figuring out a solution for your debt problems. You need to accept that you are in trouble, so that you can start coming up with a solution. Do not keep the debt situation a secret from those closest to you- they are the ones who are most likely to help you get through this complicated time. This would not be a bad time for you to seek professional help either- this would help solve your financial and emotional problems.

A lot of people do not seek help when they realize they are in deep debt, and this traps them in a never-ending cycle of more borrowings and increasing debt. Do not let that happen to you- you are still in charge of your life, and you can certainly take all of that back.

How soon should you start repaying your loan?

Living in debt can be really complicated, and a lot of people end up making mistake because of the same. People only have so much money, and it can be really confusing to prioritize at this point of time, as well. So, what do you do with your income? How do you start repaying your loan? Should you focus on repaying the loan or divert more of your attention towards saving for the future?

There is no single correct answer. There are some people who prefer starting their loan payments earlier on so that they don’t end up spending a high amount of money in the form of interest. However, this depends on your income and your current major expenditures. It is easier for you to start early payments on your loan if you are single and do not have a family to worry about.

Loan Repayment

If you do have a family and you want to stay ahead of your loan payments, you would have to be very careful about your expenditures and make sure that you save as much money as you possibly can. This way, you will be able to pay back your loans without your savings suffering a huge setback.