Borrowing money is like any other decision, and especially a financial decision, requiring careful thought and consideration of all the factors before committing to the decision. So whether you are thinking about a one-off purchase like a nice car or a fairytale wedding, or maybe a bigger spending commitment like renovating your home, it is extremely important to really think and analyze all the ins and outs of what you want or need, in addition to what credit option serves your needs the best. So, to help you along this path, we are going to give you a few things you should consider and tips you can take advantage of before deciding to borrow money.
What Is the Money for and Can You Repay It?
First of all, before anything else, you should ask yourself what exactly you want the money for. The reasons for this are more than obvious, but among them is that when you have a clear idea of what the money will be spent on. Handling money responsibly is absolutely necessary if you are going to ask for payday loans from Centrelink, for example, and use them according to your needs. You may get a Centrelink loan of up to $10,000, and the money will be transferred into your account. You may choose a repayment term between 16 days and 1 year. Consider carefully how the entirety of the money you want to borrow will be utilized, as well as calculate exactly how much you will definitely need to have borrowed to achieve your set goals. This will let you work with your lender or bank to decide which type of credit or loan will best suit your purposes, which may very likely be taken into consideration when you are applying for it. So, make sure you can demonstrate that you have put some serious thought into the whole thing before applying for the loan.
Can You Pay It Back?
An equally important thing you should consider is whether you will actually be able to pay the money back, as nobody, especially not banks, is interested in giving away money for free. Whoever is lending you the money will look at whether your occupation makes any money or whether you have any other means by which you can pay the money back, including your credit score, which we will go a little more in-depth into later. So if you have a new business, for example, you will have to provide the bank with information on whether you will use collateral or some other means to pay back the loan. Also, be aware that making the monthly payment will most likely mean you won’t have as much money to spend as you want or are used to, so something like a monthly budget is good to keep handy.
How Much Is It Going to Cost?
Obviously, this is very important. One of the most important things you have to be aware of and consider before borrowing any money is the APR, which stands for Annual Percentage Rate. What is this APR? Put simply, the APR is the cost of borrowing money, the amount of interest that is added to the total amount owed each year, including other associated fees. APR is worked out on a yearly basis but paid monthly as part of the regular payments you make. You should be aware of all this, as you will only be provided with your actual or personalized APR once you have applied to borrow the money and a “hard credit search” has been done. This hard search will leave a mark, or footprint, on your credit file, which will be visible to any other lenders or the like, and it can also have a negative effect on your credit score and may even cause harm to it if multiple hard searches have been done within a short time.
Can You Afford it?
If you end up taking out the loan, you will need to pay the money back in monthly installments, which means you need to be able to ensure and prove that you can afford to pay them. Part of the process when applying includes a lender assessing how affordable the loan will be based on your income and general financial situation. Not only your current situation will be assessed but also the outlook and prospects for the long term until all the repayments have been completed. To help with all this, maybe consider having a monthly budget so you do not stray too far off-track, and if you are able to, have some savings outside your repayment to act as a sort of buffer, if you will, in case sudden financial catastrophe strikes or something of the sort—something that is very much out of your control and could seriously impede your ability to repay the loan.
Credit Damage
You should know that each time you end up deciding to borrow money, and you don’t repay it as agreed, aside from every other legal and ethical issue, you risk damaging your credit score. However, if you do make the monthly payments, then the loan can actually be a credit builder, as it demonstrates that you are reliable and make good on agreements. This is all quite important, as your credit score has effects that ripple out into many other aspects of your financial situation, like perhaps your ability to get future loans, whether you can buy your dream home or rent that long-awaited apartment, and so on. So, it is always a good idea to check your credit score and steadily aim toward improving it.
Borrowing money is no small decision to make, and before you commit to lending money and owing someone monthly payments for what may end up being quite a while, you should do all the research you can, analyze your own situation as much as you can, and think of any hidden skeletons that may jump out of the closet at the worst time possible. Use the questions we have given you as the blueprint, and if you think it necessary, spread the questions out a bit and add any others you may think of.
