Borrowing money to cover the cost of things you need and want (but don’t have the funds upfront for) is pretty common. When used appropriately, loans can be used to do anything from buy a house or a car to funding a dream vacation or paying an unexpected expense. Though convenient and now easier than ever to apply for, however, all too often consumers bite off more than they can chew.
They put in a loan application, get approved, receive the funds, and, somehow fall deeper into debt. Though there are a lot of reasons that borrowers end up in this situation, one of the most common reasons is simply because they couldn’t really afford the loan in the first place.
As great as lending products such as easy installment loans are, if you’re borrowing funds without knowing if you can really afford to pay it back, you’re putting yourself in a hole that will be hard to get out of. So, before putting in an application, it’s best to be honest and ask yourself, “Can I really afford to take out a loan?” Here are some factors to consider:
Though lenders review your income to determine whether or not you meet certain criteria to be approved for a loan, only you know what you can really afford. If your income fluctuates, you’ve just recently started working, or you’ve heard rumors of layoffs, perhaps you should think hard on whether or not you can afford to take out a loan.
Just because you bring home $2,000 a month after taxes doesn’t mean that you can afford to borrow $2,000. Remember, you still have other expenses to pay for each month that need to be factored into the equation. Before accepting a loan, take a look at your expenses to determine if and how much you have left over to contribute towards loan payments. They have budgeting apps that can make it easier for you to see all of your monthly expenses in one place.
The last factors to consider before borrowing money are the details of the loan. How much will you be required to pay in interest? What is the amount of monthly loan payments? How long do you have to repay the loan in full? Are there other associated fees that you’ll need to cover? Using the example above, if you get approved for a $2,000 loan but have to it back with interest in 3 months, is that really enough time (considering your other financial obligations) to pay it back in a timely fashion? If the answer is no, consider renegotiating the terms with the lender or skipping the loan altogether.
There are times in life when everyone wants or needs to make a purchase, but doesn’t necessarily have the funds right now to do so. In those instances, borrowing the money from financial institutions seems feasible. Though convenient financial solutions, before signing a loan agreement it is imperative to know what you can afford. Using the factors above, be sure that you’re going to be able to borrow responsibly so you don’t end up in a cycle of debt.