With the enormous rise of lending institutions and banking industries, taking a loan is just a matter of seconds. Financial institutions are luring customers for a big purchase with a guarantee of 1 year to pay, no collateral, zero interest or other hype.
But you must take into account these 4 factors to consider before having a loan or you will blame yourself in the end.
1. The purpose must be a need or has a future value (FV) appreciation
Needs: house, car, education
FV: business, investment
iPhone is not a need, communication is. But you can simply have a cheaper phone to provide your communication needs. Likewise, BMW is not a need, travel is. And you can opt for a reliable Toyota without having any trouble. In any way, it will depreciate and are not worth for a loan.
Meanwhile, loans for business and investment are different. It doesn't guarantee a return but the payback outweighs the loan undertaken. Best example is business loan. How about having a $5,000 loan, payable in one year with monthly installments of $480 but the potential income is $1,000 a month?
That would be $520 pure profit every month! That is considered an unlimited ROI since there is no cash outlay or No Money Down!
2. Monthly payments are affordable
If the above condition is met, make sure you are capable of repaying it. The source of paying off the loan must be decided. Else, your credit rating will suffer. Bear in mind that the loan must not affect your savings, short-term plans and other monthly expenses/bills/loans.
3. Annual Percentage Rate (APR) is industry average
Most of us don't really mind how one loan could ruin us financially. Some loans would take 10 years and it really sucks.
By default, APR should not be more than 16%, else seek another lender. In most cases, banks' annual rate ranges from 12% - 16%. Choose the lowest.
If a loan really matters to you and can't afford to miss that opportunity, try to negotiate the APR and/or increase your monthly payments to shorten the term. Take note, the latter may sacrifice savings or plans so evaluate wisely.
4. Commit yourself to pay off the loan
Acquiring is bliss but repaying is painful. Self-conviction is very important as it will make or break your credit standing. Bad credit standing will result to lesser chances of future loans from creditors. Handle debts carefully. The purpose of the loan is reward; paying off the loan is the offering. So take it positively.