Ask Away...: The Right and Wrong Time to Take out a Loan

Monday, August 14, 2017

The Right and Wrong Time to Take out a Loan

Loans are often seen as evil things to avoid because you’re borrowing money, and companies usually aren’t willing to lend you cash unless there’s something in it for them. Most of the time, their reason for giving you money in the first place is because they charge interest on it. Interest is what makes loans such a pain to deal with, and it can be the source of emotional stress and financial worries. However, that’s not to say that loans and credit should never be considered.

There are right and wrong ways to use a loan, which is why we’ve compiled a small list of how to make proper use of your borrowed money.

The wrong way to use a personal loan

One of the most common ways that people use a loan is to cover the costs of something they currently can’t afford. Let’s say that you currently have $5,000 in the bank, but a home renovation that you really want costs $10,000. If your paycheck is arriving soon, then you may consider taking out a loan of $5,000 or more to cover the difference and then simply pay it back as soon as possible.

While this seems like a good idea, taking out a loan to pay for something you can’t already afford is usually a quick way to spiral out of control. Not only does it make your paycheck seem completely worthless when it arrives, but you also have less control over your finances when you constantly owe someone money. To add to this problem, you also have to pay interest on top of what you borrow, which is ultimately a waste of money.

If possible, try and just wait it out unless you need the money for an emergency that can’t wait. Take a serious look at the reason you’re borrowing money and if it’s not for personal or luxury reasons, then there can be some exceptions where you have to take out a loan for something you currently can’t afford.

The right way to use a personal loan

Now let’s take a look at the right way to use personal loans. If you’re going to get a large lump sum of money for something, then one of the best ways to use it would be to tackle existing debt. This sounds like a crazy idea, but it’s something that is frequently done already and it’s known as debt consolidation.

How it works is you pay off all of your existing debts in a single payment. The amount itself doesn’t matter, it’s more about paying off your outstanding balances before it incurs more interest that you can’t afford. Now that all of your debts are cleared, you still have debt! So what’s the point, you ask?

The point is to consolidate all of your debts into a single low-interest payment. If you let your bank or lender know that you’re borrowing money to pay off your existing credit and debts, then they’ll usually be willing to tailor a repayment plan for you so instead of paying back interest to several different companies, you’re only paying it back to a single lender.

There are many other ways to use personal loans, but paying off your debts is a surprisingly good way of using them assuming you get lower interest rates and end up paying off your debt faster.

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