Taking out a loan is a big decision. Sure, it gives your budget a boost so that you can cover a big expense or unexpected bill. But the typical personal loan comes at a cost. Depending on your credit history, you may be shocked by the price tag.
The cost of borrowing may be worth it, but how can you tell for sure? Let this list help. Here are three ways to check if your next loan is something you can handle.
1. Read the Rates, Terms, and Conditions
These crucial details shed light on how much interest applies to your loan and when. They also list any other finance charges, as well as penalties should you fail to meet your obligations.
You can typically find these elements in your loan contract, but you shouldn’t have to get this far to see them. Rate shopping is an essential and expected part of the borrowing process, so you should research your rates and terms before you sign any legal document.
Nowadays, there is a lot to read before you borrow. There are plenty of borrowing options, including payday loans, installment loans, and lines of credit to name just a few.
If you aren’t sure what the differences are, you can read about online payday loans from MoneyKey’s financial literacy portal. It shares the basics features of cash loans while comparing them to installment loans and lines of credit.
2. Compare These to Your Budget
Before you sign a contract, always compare your payments to your budget. This means you’ll need to brush the dust off this spending plan if it hasn’t seen the light of day for a while. Get to know your net income and tally your usual monthly expenses. Some of these may end up being on the chopping block to accommodate your repayment.
Some sacrifice is normal. Tweaking your budget helps you prioritize the cash you have on hand, so you’re able to cover your repayments and essential expenses comfortably. But there is a limit to what you can reasonably cut out of your budget.
If you would have to skip out on other necessary bills to afford your payments, you’ve crossed a line. Paying off your debt shouldn’t come at the sacrifice of other essentials like rent, utilities, or your credit card bill. This will just land you in hot water in other ways, as you may face late penalties or added interest.
Go back to shopping for a loan that you can manage while paying all your other responsibilities.
3. Trust Your Gut
Sometimes, your contract and budget give you the green light, but something holds you back from pressing the gas. Your gut may have you second-guessing your choice.
Borrowing money will always be a risk, but it needs to be a calculated one to pay off in your favor. If a bad feeling persists throughout your research, there might be a reason for it.
Learn to trust your gut. Your intuition sometimes taps into something your subconscious has flagged as an issue that you overlooked.
As you gain experience and improve your financial know-how, your intuition will align with all the research you do. Between these three things, you’ll be in a better position to decide if an installment loan is an affordable option for your finances right now.