How Will You Know When a Loan Makes Sense For You?

Borrowing money can be a confusing process and you may be concerned about whether you should take on a loan or not. While debt can unquestionably be a bad thing that leads you into financial trouble, in many situations, borrowing is actually the right thing to do so. However, you need to know whether taking a loan makes sense or not in your particular situation.

How Will You Know When a Loan Makes Sense For You?

Here are some tips to help you to determine how you can find out if a loan makes sense for you.

  • Do you really need the money? In many cases, you absolutely need to borrow the money because it would cost you much more if you did not do so. For example, if your car breaks down and you need to have it in order to get to work and keep your job, it would cost you a lot more money not to take the loan since you would lose out on the income that you earn from your job. Likewise, if you need to borrow the money to pay your mortgage or rent and avoid a costly and credit-damaging eviction or foreclosure, borrowing the money to meet these necessary expenses is often the right choice.
  • Are the terms of the loan reasonable? The terms of the loan are going to vary depending upon what type of loan you are taking out. For example, Bank Rate provides information on what you should be aware of before refinancing your home. The Bank Rate information is useful because it helps you to decide if taking on a new mortgage for your house can actually make financial sense or not. The terms of a mortgage loan are really different than the terms of other kinds of loans, such as those provided by or those provided by credit card providers. You need to understand what is standard for the kind of loan that you are actually looking for in order to assess whether you are getting a good deal on your borrowing.
  • Can you qualify for the loan? For some kinds of loans, such as personal loans, there is no guarantee that you will be granted credit and given the opportunity to qualify for the loan. When you take on other kinds of loans like a title loan, you don't need to worry so much about your credit score since that isn't important in determining whether you are approved for credit or not. It doesn't do you any good to waste time applying for a loan that there is no way you are going to get, so you should think carefully about whether you are likely to meet the loan qualification requirements or not before you decide if the loan is right for you.
  • Can you pay the loan back? You do not want to get yourself into a situation where you take on debts that you have absolutely no way to pay back. If the loan is a necessary one in order to save you money (like a loan to fix your car to get to your job), then you should still make sure you can find some way to repay it before you borrow the cash. This may involve working overtime for a little while or cutting other things out of your budget, but regardless of how you make the math work, you should never take out a loan unless you have at least some plan for how you are going to repay the money you have borrowed.
  • Will you get the money in time? If you have a pressing expense, you need to make sure you find a source to borrow money from that is not going to make you wait weeks or months to get approved and get your cash. Otherwise, what's the point of even borrowing?

These are just some of the many key factors to consider when deciding how to know whether a loan makes sense for you or not. The right answer to this question is going to depend upon your situation and will require you to carefully weigh the benefits of the loan with the disadvantages that can go along with being in debt.

Janet Pelk has worked in finance for many years. From bank teller to loan officer to financial blogger, she's been there, done that. So pay attention—you just might learn something!

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