Anytime when you think of borrowing money as loan for business or for personal reasons, you must remember that taking a loan is a serious commitment. Once you have signed on the dotted lines of loan agreement you have agreed to pay back the sum you have borrowed plus interest within a certain timeframe. Not being able to make the repayment make people land in several kind of troubles. Therefore, it’s important to understand the commitment in order to avoid debt nightmares.
Do you really need the loan: It’s common for people to ask for loans so that they can go for expensive vacations, buy luxurious consumer durables for personal uses etc. Such loans do get approved depending on your eligibility, but you need to ask yourself that do you really need the loan. Buying the things which you really do not need by taking loans is not a good idea. Ask yourself that for the item which you want to purchase is taking a loan really necessary. For the non essential items you can save on regular basis and acquire them once you have enough to pay from your savings. Before you go for a business loan ask yourself whether there are other options. New ways are available now days like crowd funding. Check if government subsidies are available for the business loan which you want to avail. You can also look out for various funding options are available for the start ups.
What kind of lender is best for you: Once you have decided that you have to take a loan, you should be aware of all the options of loan and types of loan that are available to you. At the same time you should also be aware about different types of lenders. Some of them are reputable as compared to others and some are to be avoided at all costs. For personal loans you can approach your bank or look online marketplace for credit lenders .Using credit cards to purchase items for your personal uses may cost you dearly because of their high rates on interest. Avoid money lenders who target vulnerable low income group people and charge very unreasonable rate of interest. They charge sky high interest rates. If you can’t pay their debts, they will pressurize you to take more debt with even higher rate of interest. They will force you into the vicious circle of debt. If you don’t make repayments, they will threaten you or even attack you. You can recognize these loan sharks because they have bare minimum paper work and sometimes no paperwork at all. Not having any paperwork for loan is a bad sign. In no circumstances you should accept a loan from a loan shark. Checkout for the credentials of the lender before taking any loan. You should prefer the lenders with good reputation and who are recognized by regulatory bodies such as Reserve Bank of India.
What are the hidden costs: Nobody wants to make a deal to realize later that they are losing money for reasons that they never even knew about. Besides the amount you borrow and the interest, there are usually other fees and charges involved. If you don’t go through all the paperwork and loan documents, they can escape your attention. They can have names like origination fees, appraisal fees, underwriting fees or administration fees, late payment charges, default charges etc. Sometimes, may charge you even for making early pre payment before the agreed tenure of the loan. So, it’s important to understand all the fees and charges before you apply for the loan.
Can you really afford it: You need to look into how much you have to make as repayment every month and how much you earn. It should not seem like too much stretch for you. Never go for loan without fitting the expected repayment into your monthly budget. Look at your spending on basic needs as rent, groceries, and utilities. Watch your spending on the things you like, entertainment, vacations, essential shopping and then work out what is left after that. If the amount that you are left with covers your loan repayments, then you may think of taking loan. If you are not left with enough money then you may think of cutting down your non essential expenses. Even after that if you fall short for repayments its better not to take loan. Most of the people who default are those who do not re-assess their budget before taking loan.
How fast can you pay it off: Having loan repayments hanging over your head for long time can ruin your efforts to build long term wealth. In business terms it’s known as liabilities, something that loses you money. What you are looking for in the long term is the opposite, assets or the things that make you money like dividend from stocks or rent from the property you own. So think carefully for how long you would be having the debt hanging around your neck. The loan will last for the period specified in the loan agreement; still you can find ways to pay it as early as possible. It’s always better to focus on the things which would make you money in the long term not lose it.
Does it come with collateral: Some loans require collateral while others don’t. It will depend on the kind of loan which you are taking. In some cases it may depend on your credit rating or credit score. In case of secured loans you will have to provide collateral security like charge of bank over your house, factory, car etc. If the loan doesn’t involve security you need to ask from your lender that what would happen if you are not able to repay the loan. Losing your car or house may not be a thing which you would like to happen to you. It would depend upon you and your situation but when there is collateral involved ask yourself this question.
What’s the worst case scenario if you can’t pay it off: You have got a plan to pay it off. You have done your calculations and adjusted your budget accordingly. What if something unexpected happens and you lose your income. Do you have a back up like savings or supporting family members who have funds and who may come to your rescue? Make sure you discuss with them before counting on them. Also run every possible scenario through your head and then ask yourself if you can accept the consequences if you cannot pay it back. If the answer is no, you might want to think again before taking the loan.
How will your credit rating come into play: Your credit rating is the score you get as a mark of how creditworthy you are. Different countries use different credit systems. They all have some common things. The better you are at making repayments of your previous debts, credit card bills and in some cases your utility bills, the better will be your credit rating. A good credit rating will help you get loans at cheaper rates on interest as well as good deals on loans as well. If you have very low credit scores then some lenders wouldn’t offer you a loan at all. Such borrowers have to approach money lenders and loan sharks. Therefore, it’s very important to make regular payments for all loans so that you have a good credit score. It would always help you to know your credit score before going to take any loan.
Will it help you make money: Is the loan which you are going to take in anyway going to help you make more money? Are you buying things by taking loans just to show off as luxurious cars, costly items etc. It’s not a good idea at all. As is said by Robert Kiyosaki in his book “Rich dad poor dad” anything that puts money in your pocket is an asset for you and anything that takes out money from your pocket is a liability for you. So, you should think again before you go for a loan. Are you going to acquire an asset or a liability from the things you purchase from the loan amount? Calculate your monthly budget and see if the loan you are taking is creating an asset or a liability for you.
What’s the APR and the TAR and who is offering the best: Annual percentage rate (APR) is the amount of interest you would pay as interest for loan each year. Total amount repayable (TAR) is the total amount repayable for the loan that is principal plus interest plus other fees and charges for the entire tenure of the loan. Whenever you want to take a loan, always calculate the APR and TAR and also compare it for the different lenders offering the loan. You should also check how the interest rate is calculated by the lender. They may calculate the interest on daily reducing basis or monthly reducing basis or at flat interest rate. Sometimes the interest rate may appear to be low but you may end up paying more money as interest. It’s because of the way it is calculated. You should therefore compare the actual interest money based on the type of calculation used by the lender and then take the decision. It will always help you to choose the best loan option for you.
Navin Kumar Singh
Chief Manager, SBILD Bhavnagar.
