Say you’re wondering if you should take out a loan. Maybe you’re trying to pay for college, get yourself a new car, handle medical bills, start a new business, or simply pay off your credit card balance. Whatever the reason may be (and there are plenty), there are some important questions you need to ask yourself first so you can be confident that it’s really in your best interest to take out a loan. With these questions in mind and the help of a loan calculator, you’ll be better equipped to handle your financial matters.
1) Why Do I Need this Loan?
Before getting into the nitty-gritty of interest rates and repayment terms, you should get down to the basics and figure out why it is that you need a loan in the first place. Is it something you absolutely need right now and can’t wait until you have more cash flow? If the answer is no, you might want to reconsider taking out a loan. If the answer is yes, is there a cheaper alternative that won’t require you borrowing so much money?
When you have your eye on something you really want, it’s not fun to slow down and reconsider whether it’s a necessity. But, it’s crucial to do so if it means you’ll have to get a loan.
2) Do I Have Other Options?
Once you’ve decided that your situation calls for more money than you currently have on hand, take a minute to review loan alternatives. Yes, there are some!
Here are some common options when you’re in a financial bind:
- Request a payment plan
- Ask for an advance on your paycheck
- Tap into savings
- Find ways to earn extra income (like with Airbnb, Uber, eBay, freelancing, garage sales, etc.)
- Get another credit card that has 0% interest balance transfers
- Consolidate your debt
- Cut down on rent by getting roommates
- Borrow from family or friends
It’s entirely possible that none of these alternatives prove to be feasible for you, and that’s okay. What’s important is that you’ve at least considered other financial routes and ruled them out before jumping into a loan.
3) What are the Interest Rates?
Many different factors are used to calculate interest rates, including the lender’s policies, the duration of the loan, your credit history, and your risk profile (the likelihood you’ll be unable to repay your loan). Having an interest rate that’s just 0.5% to 1% lower than another can add up to thousands of more dollars that you will owe over the course of your repayment.
Rather than just accepting the interest rate of the first loan you look at, your safest bet is to get a few different quotes so you can compare the numbers and choose the best option. You may even be able to use these differing rates as a bargaining chip with lenders. But, be careful. Applying for a loan can also create a hard inquiry on your credit score, which can lower that score, making it harder to apply for a different loan in the future.
4) What are the Payment Terms?
There are short-term loans, which can last a few months, and there are long-term loans, which can last for several years. Each has its pros and cons as well as unique eligibility requirements. You may want a long-term loan so you have more time to pay it off, but this usually comes with higher interest rates. Therefore, you may find it easier to get approved for a short-term loan instead.
Besides a loan’s interest rates and duration, there are other payment terms you should consider and these may not be capture in simpler loan calculations. For example, some loans have a loan processing fee where you’re charged just to process an application. Then there are sometimes prepayment penalties (where you’re charged if you pay off the loan earlier than the full term) and late payment fees.
All of these variables could sway your decision regarding whether or not to take out a specific loan.
5) What is My Plan to Pay Back this Loan?
When figuring out how you’ll pay back a loan, it’s in your best interest (no pun intended) to make a plan so you can prepare your budget accordingly and not end up in further financial trouble.
An easy way to make this plan is to use a loan calculator. With GIGACalculator’s loan calculator, you can enter your loan amount, term, interest rate, compound frequence, and payback period to see how much you’ll have to pay back every month. It will also tell you your total payments and total interest in dollars.
With those values, you can then revisit your budget and make the necessary adjustments.
6) What Happens if I Need to Default?
As mentioned earlier, applying for a loan can take some points of your credit score. But, that’s not so bad compared to what will happen if you can’t repay your loan in time and end up defaulting. This can hurt your credit score significantly, making it extremely difficult for you to do something like buy a car or rent an apartment. Depending on the severity of consequences, you may also end up having your wages or tax refund garnished, getting your car repossessed, or undergoing foreclosure.
While there are always unforeseen life circumstances that can pop up, you should pursue a loan with reasonable confidence that you won’t default since these are some serious consequences.
The Bottom Line
If you aren’t fully prepared to handle a loan and choose to take one out anyway, it can really hurt you financially. That being said, a loan can also help you reach financial freedom if you go about it the right way. Therefore, it’s worth the time and effort to ask yourself in the very beginning whether or not you should take out a loan in the first place. Ultimately, see if you have other options and consider all the pros and cons of the loan’s terms. Your wallet and your peace of mind will thank you for it!
Cindy is a freelance writer and editor with previous experience in marketing as well as book publishing. Along with her content writing for a diverse portfolio of clients, Cindy’s work has been featured in Thrillist, The Points Guy, Forbes, and more.