5 Questions you need to ask before taking out a loan

Taking out a loan is a big financial decision to make and one that shouldn’t be taken lightly. No matter how large or small the loan is, there are a number of important questions you need to ask yourself before agreeing to the loan. Answering these questions will provide you with some basic knowledge about whether or not you can afford the loan and ultimately whether you should take it out or not.  

How much do I need to borrow?

The first question you need to ask yourself is how much money you need to borrow. Too often people get offered a loan higher than they actually need, while it can be tempting to agree to this it is important to only stick to a sum that you actually need. Remember, taking out a loan is there to help you buy something you are willing to be in debt to purchase and taking out a higher amount than needed often just leads to wasting the money.  

What monthly repayments can I afford?

Next you need to find out exactly how much you can afford to pay back each month. You should try to pay back the loan as quickly as possible, meaning that you need to pay as high a sum back monthly as you can. However also keep in mind that you need a good standard of living while paying back the loan and if you cannot afford high monthly repayments while also retaining your lifestyle you should perhaps rethink taking out the loan.  

How long will it take me to pay back the loan?

Even if the creditor hasn’t put a specific time-frame on when the loan needs to be paid back you should have a good idea of how long it will take you to pay it off in full. This will help you to see an end to your debt, helping you to keep up with your high monthly repayments. It will also help to prevent you getting into a cycle of debt, as if you cannot see an end to paying back your loan you will be more likely to take out another one before the initial loan has been paid back in full.  

What happens if disaster strikes?

When taking out a loan you need to have a plan in place in case the worst case scenario happens and you find that you will struggle to pay back the monthly repayments. This can be anything from suddenly being made redundant to suffering from a long-term illness. Whatever the reason to your drop in income, you must know how you will deal with whatever unforeseen circumstance can happen. Sometimes a creditor will agree to you paying back a much less sum each month, or even put a hold on the repayments.  

Can you afford it?

Finally, you need to ask yourself if you can afford to take out the loan and if it is worth getting into debt for. While we live in a debt-friendly society and loans are often a safe and simple way of getting some extra needed money, taking out a loan should always be carefully thought through beforehand.