Taking out a loan. When is it really necessary?

A loan is a convenient financial instrument if you know how to use it correctly. However, borrowed money requires responsibility, discipline and the right approach to choosing a loan. 

Before taking out a loan, take a break and think about whether you need this money, whether you can do without it and how you will return the amount received. Consider not only your salary or pension, but also possible difficult circumstances. A layoff, illness, or crisis can disrupt the most elaborate plan.

There is a simple and important formula: the monthly loan payment should not exceed 30% of your monthly income. Concentrate on it. Also, make a financial plan to accurately forecast income and expenses.

How to choose a reliable bank?

The proximity of a branch or a bright sign is not the best criterion for choosing a bank. The market is full of offers, so look at options from multiple organizations. Compare terms and costs to choose the loan that suits you best. Do not forget to inquire about the bank’s reputation.

If you are a student or retired, inform the bank employee about this: there may be special offers for you. Also, you should check the first horizon routing number. And remember, It is important to take a responsible attitude towards the conclusion of the loan agreement and remember that by signing it, you agree with all the prescribed conditions and assume obligations to fulfill them.

Any loan agreement must contain essential conditions: the amount, term and procedure for the provision and return (repayment) of the loan, the amount of interest for using the loan and the procedure for their payment. This list also includes the responsibility of the lender and the borrower for non-performance or improper performance of obligations under the loan agreement.

Do not forget about your rights

The internet is full of creepy tales of brutal collectors and unaffordable late payment fines. Take out a loan only from organizations that have a license. Do not borrow money from black lenders, banks and collectors operate according to the law. If the creditor turns out to be a scammer who threatens you and violates your rights, contact the police.

If the circumstances are such that you cannot make the next payment, have lost your job or are sick, do not hide, do not change your phone number, but honestly talk with the bank representatives. This does not mean that you will be forgiven the debt – you will have to return the money in any case. But it is likely that the bank will provide an extension or recalculate the amount of contributions.

For example, it will reduce the amount of monthly payments by increasing the loan term. If you are not sure that you will be able to repay the loan, it is better not to take it. If you decide to take out a loan, but want to keep everything under control, it is worth insuring against loss of ability to work.

Useful and useless loans

Loans can be divided into two categories: those that will be useful and those that are useless. Useful loans are funds that in the future will compensate for losses incurred due to loans. These can be loans for business, home or car loans.

All other loans are considered unprofitable: the borrower will have to return with interest the amount that he could potentially accumulate on his own. These include consumer loans: they are most often issued in small amounts, since they are intended for small spending.

Consumer loans are targeted (when the bank issues a loan for a clearly stated purpose in the contract: to buy a car, household appliances, for medical treatment) and inappropriate (in this case, the borrower has the right to spend the money received at his own discretion).

It is recommended to use small loans only in emergency cases: for example, when money is urgently needed for treatment. If you need small household appliances, it is better to use installments: this way the amount of overpayment will be minimal.

So, before taking out a loan, you should evaluate:

  • Will there be enough savings to pay off the loan? Debt load should be less than the monthly family income, at least twice.
  • What are the risks? During long-term loan payments, it should not be ruled out that at any time you may be overtaken by dismissal or illness. Even during lending, the family’s income should be able to save at least small amounts for a “rainy day”.
  • Whether saving will be inconvenient. If the debt burden does not allow you to enjoy the usual way of life, over time, the stress of repaying the loan can develop into a serious crisis. Do not forget about your own psychological comfort.

Avoid common mistakes when obtaining a loan, take your time and take the time to study the nuances so that the loan becomes a useful financial tool for you, and not a source of problems.