7 Things to Know Before Taking Out a Loan

People get into financial difficulties for several reasons. They could be through unwise use of money, such as gambling or poor investments and purchases. Others struggle through things beyond their control like losing a job or needing to pay unexpected medical fees. The harsh reality is that once people sink into debt, things can spiral and become entrenched. Having gained a poor credit score and credit history, there are many challenges to overcome before one can break free.

About 20.2 million people borrow in the US. Taking out a personal loan can seem like the perfect solution for many, particularly if it involves fulfilling a personal dream or gaining quick access to some much-needed funds. Having said that, there are many aspects to consider first.

This article gives you seven key things to think about before proceeding.

If someone needs to borrow so they can start a business, it could be seen as a long term investment. However, it is highly important to be sure the company will succeed and make mone. Loans have fixed payment terms, so it's essential to know if the business income will be generated soon enough. If the loan is for a car so someone can work, this is a valid need. Cars become personal assets and some people use them as a taxi in their free time to raise extra money if needed.

Many loans are taken out for things like home improvements. Whilst adding an extra bedroom for a child seems sensible, many improvements are merely cosmetic. In the 21st century, people want things quickly. In days gone by, many people didn't buy things until they could afford them. These days, people simply look at their credit cards. Some personal loans are taken out so a person can fulfill their dream. It may be wise to simply postpone that action.

One cannot stress enough the need to do the maths before taking out a personal loan. If a person's home is used as collateral, it will mean there will be a lower interest rate as the company is taking less risk in lending. On the downside, people do lose their homes if they cannot pay their loans.

One has to know the amount loaned, the interest rate, the repayment amounts, and the loan term. Also, some companies charge a loan processing fee (often 1% of the loan value). They may also add failed payment fees and fees if the debt is repaid early. Would-be borrowers need to look at their incomings and outgoings to see whether the loan is viable.

If a couple owns two cars but only need one, it may be wise to sell one if the proceeds will provide the much-needed funds. A three bedroomed house may be ideal when there are children at home, but downsizing, once they have left, is a great option. Fewer rooms are now needed, and money can be released without having to borrow.

Any valuable goods we possess are counted as assets, so we should consider whether they are essential, or if they can be sold to solve our financial problems.

Even when someone has bad credit, there may still be hope for this avenue to be successful. Whilst many lenders will refuse people with a bad credit history, there are more possibilities than one would think - even if someone has missed payments, defaulted, or had CCJs. The experts here say even some people suffering bankruptcy, payday loans, or mortgage arrears have been able to remortgage. Remortgaging is a great way to consolidate debt, release equity, or raise money for a purchase.

People with a good credit rating should go to their bank first when they need to raise some money. They are likely to get a better interest rate on their borrowing than going to a personal loan company. Borrowing from family or friends may be a good line to pursue. Even if the money has to be paid back, it's unlikely to have interest added to it in the same way loan companies will.

When calculating one's monthly budget, it's easy to miss things, such as annual subscriptions, bills or taxes. There are also other unexpected things to allow for, like job redundancies, surprise medical fees or urgent car or home repairs. It is always wise to have an emergency fund, and with sole earners, it's even more so. The liquid fund should ideally cover three to six months' salary. The sum should be ring-fenced, and only used when it's absolutely essential.

It's important to look at a calculator before proceeding with a loan and to check out alternatives like remortgaging, postponing borrowing, or releasing other funds. The bottom line is, before taking out a loan, ask yourself if it is worth it, and if you can afford to pay it within the time allowed. Then and only then should someone take things to the next level. Loans ideally exist to serve us, not be our masters.