Borrowing money is a big decision because once you go into debt, you need to catch up and pay back the cost of the money you borrowed. Borrowing money is not free either, as you will need to pay interest for taking the loan. This means that not only do you need to repay the debt for the original loan but you also need to repay the interest as well.
Although it can cost money to take a loan, sometimes it is a smart financial choice to borrow money. You need to decide if borrowing is a good choice in your particular situation and you need to carefully evaluate your options in order to make the determination about how much you should borrow and the type of loan that you should take.
Considering if a Loan Makes Sense
When deciding whether you should take a loan, there are a number of different factors that you should consider. Some of those factors include the following:
- Is it necessary for you to make the purchase right away (and borrow to do it) or can you wait? About.com advises that young people ask this as their very first question before they decide to take out a loan. If you do not need to buy the item that you are thinking about borrowing the money for, it is usually a better idea to just simply save up until you can pay for it in full. Otherwise, you end up paying a lot more for the item as you pay interest on it every single month.
- Is the loan going to allow you to buy something that increases in value? Many people divide debt into "good" debt and "bad" debt. Good debt is debt that serves a higher purpose and that is likely to improve your financial condition for the future. For example, taking out student loan debt or borrowing money to buy books you need for school would be considered good debt because you are making an investment in yourself and your degree is going to help you do better with money over the long term. Mortgage debt is also considered good debt in most cases, because your house is an investment and is likely to appreciate or go up in value over time. On the other hand, borrowing money for a car or for personal assets like televisions or electronics is usually not a very good choice because these things decline in value as soon as you buy them. You'll have borrowed money (and paid interest) to get an asset that is worth less than the amount you borrowed.
- Will it cost you more money to borrow or not to borrow? There are certain situations where you will actually spend more money if you do not borrow. For example, if you are going to have your utilities shut off and it is going to cost you $100 to turn them back on, it may make sense to get a payday loan from Hotpayday.com to give you the cash to pay your utility bills until payday. The loan would cost you less than the fees you would need to pay if you didn't borrow. The same is true if you are in danger of being evicted or if you need to get your car fixed so you can get to work and don't lose your job. There are a lot of situations where it makes sense to take a short-term payday loan instead of incurring other big expenses.
- Can you afford to pay on the loan? This is also an essential question that you must ask yourself before you borrow any money. A failure to pay back a loan can do serious damage to your credit and you could end up with big late fees and a whole host of other costs. You should find out what you will need to pay each month, and how long you need to pay it for, before you borrow the money.
These are the key considerations to think about when you decide whether taking a loan makes sense for you or not. You also need to make sure you can qualify for a loan, of course, but with payday lenders and certain other loan providers, your credit does not disqualify you from borrowing and it is possible to get the money that you need.
Kevin Olney is a financial expert. At least he views himself that way after obtaining a finance degree and blogging about finances non-stop. One thing's for sure, he's ready, willing, and able to hand out all the advice he can!