July 23

Always Ask Yourself These Questions Before Taking Out Credit

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Do you remember the financial crisis of 2008? It was a strange time. For decades, banks had lent people money to start their businesses, place orders with suppliers, and hire new people. But all of a sudden, they stopped lending to protect their balance sheets, and the entire economy seized up. It was a disaster.

What the episode showed everyone was the importance of credit. Sometimes taking out money is a good thing. It gives you the cash you need right now to buy things that will make you wealthier in the future. It’s a kind of failsafe that protects you from going out of business as long as you are profitable overall. 

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Credit, therefore, is a good idea, so long as you use it wisely. The problem with the modern world is that the majority of people do not. People take out loans for all kinds of unproductive things, such as grooming their pets or going on holidays. The problem with this is that it puts them into debt, and being in debt is expensive. 

So what questions should you ask yourself before taking out credit? Let’s take a look. 

Do I Need To Make This Purchase Right Now? 

Sometimes you need to make a purchase there and then, and if you don’t have the money to do it, that can be a problem. Let’s think about some examples: 

Do you remember the financial crisis of 2008? It was a strange time. For decades, banks had lent people money to start their businesses, place orders with suppliers, and hire new people. But all of a sudden, they stopped lending to protect their balance sheets, and the entire economy seized up. It was a disaster.

What the episode showed everyone was the importance of credit. Sometimes taking out money is a good thing. It gives you the cash you need right now to buy things that will make you wealthier in the future. It’s a kind of failsafe that protects you from going out of business as long as you are profitable overall. 

Related: Apply These 12 Secret Techniques To Drastically Reduce Your Financial Stress

Credit, therefore, is a good idea, so long as you use it wisely. The problem with the modern world is that the majority of people do not. People take out loans for all kinds of unproductive things, such as grooming their pets or going on holidays. The problem with this is that it puts them into debt, and being in debt is expensive. 

So what questions should you ask yourself before taking out credit? Let’s take a look. 

Do I Need To Make This Purchase Right Now? 

Sometimes you need to make a purchase there and then, and if you don’t have the money to do it, that can be a problem. Let’s think about some examples: 

Even if you desperately need something, the second question to ask is whether you can afford to make the repayments. 

Let’s take the example of a business, again. If your business is making a profit overall, then it makes sense to go into temporary debt to cover your cash needs. You might, for instance, need to pay staff salaries before the money from a big contract comes through. If however, your business isn’t making money, and it doesn’t look like it will in the future, then you may not be able to finance loan repayments from your profits. Why? Because you’re not making any profits. 

Likewise, it doesn’t make sense to take out the loan on a new car for work if you can’t afford repayments on your current salary. In situations like these, you’ll want to compromise, either by buying a cheaper car or looking for different work. 

Related: How to Pay Down Your Debt Faster With The Debt Snowball Method

Think about your debt-to-income ratio. For people on an average income, it’s prudent to keep this ratio below 25 percent of your total earnings for the year. More than this, and you’ll struggle to afford interest payments and could get into a debt-spiral. 

Can I Get The Amount Of Money I Need? 

Getting the credit you need can be a challenge. Even if you can afford repayments and there’s a good reason for taking it out, lenders might not lend. 

Many people have a checkered past when it comes to loans. For instance, you may have missed a payment on your utility bills or been declared bankrupt. If that’s the case, then you may have a poor credit rating which prevents you from taking out loans. There are such things as bad credit loans with a guarantor which can help you get money if you have good reasons for it. These loans rely on somebody with a good credit rating saying that they will pay back your loan if you do not. 

Related: How To Fit Those Extra Expenses Into Your Budget

Most guarantors will want proof that you have the means to pay them back. They’ll want to look at things such as your business plan or what you plan on spending the money on. 

How Long Will It Take Me To Pay Off The Loan? 

Many people just look at the monthly payments for a loan and ask themselves whether they can afford to pay them. But is this the right approach?

Ask most financial experts, and they’ll tell you that it’s not. The monthly price of a loan could be small, but you may be locked into paying it back for many years, cutting into your wealth or profits. In general, the longer the period of the loan, the more you’ll pay in interest. A five or ten-year loan can involve more than the original amount you got with interest. 

Related: 5 Ways To Raise Some Much-Needed Cash

If you’ve already taken out a long-term loan, then look for ways to pay it off faster. Paying extra every month can cut your total interest bill and help you save more money in the future for your retirement. Remember, it is something necessary to take out a loan. But the purpose of the loan should be to ensure higher personal wealth in the future. Avoid financing consumption in the present. 

Can I Buy Something Less Expensive Instead? 

Spending a lot of money on lavish consumer products is a joy for many people. But it’s also a great way of slashing your chances of becoming wealthy and thriving in the long term. 

If you’re planning on taking out a loan, it’s worth asking yourself whether you can buy something less expensive instead. Almost always, there’s a less expensive, perfectly functional version of the thing you want to buy that will meet your needs. It might not be the best or the newest, but it’ll get the job done. 

For instance, if you want to buy a car, you can often pick up a perfectly serviceable ten-year-old vehicle at a fraction of the original sale price. You’ll spend more on maintenance, but much less overall. You can then put your money in an investment account and make it grow, providing you with a source of passive income. 

Related: It’s Time To Start Being Smart With Your Money

The other thing to do when making a large purchase is to investigate whether you are getting the best value for money possible. Markets are complicated. You might find what seems like an expensive way to get the thing you want, only to find out after you’ve bought it that there’s a much cheaper way of doing things. 

Take selling your house, for instance. You could go down the old-fashioned route and sell through an estate agent. But if you do that, you could be liable for tens of thousands of dollars in commission. However, if you go through an online agent or a hybrid agency, fees are much lower. 

What Are The Consequences If I Don’t Pay The Loan? 

The financial circumstances of your life today are unlikely to continue forever. At some point, you may lose your job or face a large, unforeseen bill. Your business could fail, or a key person in your enterprise could fall sick or leave. 

Because the unexpected can happen in life, you need to be prepared for a future scenario in which you’re unable to repay the loan. 

If you lose your job, for instance, you’re under extra pressure to find one fast so that you can continue keeping up loan payments. You could be forced to take work that doesn’t use your skills fully and puts you at a long-term financial disadvantage. 

If you lose a significant client for your business, you’re under more pressure to find a replacement fast.

Related: What Should You Be Saving Money For?

There could also be ramifications for your future if you can’t pay back a loan. Some employers, for instance, will look at your credit history and ask themselves whether they want to take you on, based on your record with money. Likewise, entrepreneurs may struggle to get the credit they need if they have had issues with repaying loans in the past. 

In conclusion, credit is sometimes a good idea. It’s what greases the wheels of the economy, allowing productive people to continue to do the things that they do even if they don’t have the cash they need, there and then. You can, however, misuse credit, and that can result in all kinds of problems. Ask yourself the questions in this article and protect yourself from potential losses. 


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banks, credit, credit cards, savings, spending


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