Anytime you borrow money, finance a purchase, or take out a loan, you should carefully consider if it is the right decision for you. Borrowing money means that you are committing to pay the money back within a certain time frame and at a certain interest rate.
Before signing on the dotted line, you should consider how borrowing money will affect your finances in the future. You don’t want to gamble and guess at whether or not you can afford the payment, how it will affect your debt-to-income ratio, or if it fits into your budget.
So while it may be tempting, ask yourself these questions before you take out that loan.
Some people who borrow money do so either without thinking if they can really afford it, because they feel they have no other option, but that often isn’t the case. It might be that you could put off making the purchase or not make it at all.
Try asking yourself:
- Could I wait until I can afford to buy the item without borrowing? I
- f there’s something I need, is there another way of getting?
Can you save up or use some savings instead of borrowing money?
Can I Afford to Make the Payments?
This is an essential question to ask yourself – and it’s important to be honest. You should consider the limits that this purchase may make on your ability to do things in the future. You may be squeezing your budget that it will be difficult to do anything else. You may come to resent or regret the purchase.
You should also consider your debt-to-income ratio. You do not want this to be higher than 25%, including your mortgage. If you want to buy a home soon, you need to keep this number even lower.
How much can you afford to repay?
It’s very important to work out how much you can afford to repay each month, as this will affect which borrowing option is best for you. Make sure you are realistic about how much you could pay if your mortgage or rent went up, if you had to spend more on things like utilities bills or if your pay was cut.
What Happens If I Can’t Pay It Off?
You should also consider the long-term effects if lost your job or suffered a substantial cut in income. This means that you have extra pressure to find a new job quickly because any late payments or skipped payments will affect your credit score.
Depending on the industry you are in, you may have a difficult time finding a job if you have a poor credit history. In short, you need to consider how you will pay this loan off if you were to lose your job. If you are in a one income household or you are single, you need to be very careful about any extra debt that you take on.
So before you sign up for a credit card, bank loan or store card, or add to an existing card or loan it makes sense to think about whether you really need to borrow money. At times like this – with economic uncertainty and rising bills – many people are now choosing to pay back money they’ve already borrowed rather than borrow more.