When is the best time to take out a loan?
Before taking out a loan, it’s important to analyse your personal financial situation. When you borrow, you are obligated to pay back the loan within a specific time frame and at a certain interest rate. Therefore, if you choose to get a personal loan, you should learn all you can about the loan and the loan conditions to ensure you are applying for the best loan.
Here are a few things to carefully consider:
- How will this loan affect your finances in the future?
- Can you afford to make the loan payments?
- How long will it take you to pay off the loan?
- Do you really need the item that you are borrowing for?
You should also consider the economic climate; Are there jobs available? Is your job secure? Do you have job stability? A recent ENCA report said South African households took on debt of more than R21-billion last year. Because of local factors such as renewed load shedding and international factors such as high US interest rates and Brexit, experts advise South Africans to limit their debt and to become financially literate. The African Bank blog is dedicated to educating readers on financial matters. So when it comes to saving, investing or borrowing, there’s a wealth of information at your fingertips to help you make the best decision for your circumstances.
When is it okay to take out a loan?
In a perfect world, you would never need to take out a loan. It’s much better and usually less stressful to use your savings to fund your major purchases. However, there are some situations where taking out a loan can help improve your life and can be used as a tool to help you move forward. If you’re struggling financially, asking for help is an important first step towards a more secure financial situation.
6 things to consider before you get a personal loan.
- If you can easily make the loan payments
Don’t be tempted into borrowing large sums of money, just because you qualify. Only borrow as much as you can afford to pay back and be completely honest in your personal loan application. If you can supplement your income via freelancing, a second job, overtime work etc. then you can put some of the extra income towards servicing your loan.
- If you have good credit
If you have a good credit score then you might qualify for lower bank loan interest rates, which means that you will pay less interest over the life of the loan and your loan payments will be lower. People with great credit ratings usually get the best loans at more affordable rates. Remember, a well-managed loan, meaning you pay your installments in full and on time, will help improve your credit rating.
- If your loan interest payments are less than your investment returns
Sometimes, instead of liquidating your investments for a purchase, it might be better to get a personal loan. For example, if your portfolio is generating returns of 15% annually and your loan interest rate is only 5%, then it wouldn’t make sense to liquidate and loose that extra 10% of portfolio returns.
- To consolidate high-interest debt
If you have high-interest debts like credit cards and you’re able to convert them into one consolidation loan, then that’s a wise decision. With lower interest payments, you can start saving money right away. Instead of having several loan payments, you now have one. It makes your debt repayment that much easier to manage.
- If the loan will help you make money
One of the greatest investments you can make is in yourself. If you know that a certain qualification or skill set will advance your career, it can make sense to use a personal loan to get some training, do some courses, etc.
- For important purchases you haven’t saved for
If you’re in a position where you absolutely must have something now and there isn’t enough time to save, a loan might be a good idea. Shop around for a loan that offers manageable payment terms.