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Borrowing money is no joke. It isn’t a step that you can take lightly, in no small part because you have to pay off the loan with interest, and that can result in a lean budget down the line. It’s your responsibility to research your options and honestly evaluate your ability to afford a loan before you ever walk into the bank or credit union.
Will This Money Help You?
Regardless of why you need a loan, ask yourself a single question before you head to the bank: will it help me? Can you reasonably attain your goals with this money? Is it genuinely going to help you get into a better place than where you are now? If so, then by all means, you should proceed.
Don’t dismiss your doubts just because you want the funds in your bank account. Remember, too, that there’s a chasm of difference between wanting something and needing it. It’s possible that this isn’t the right time, and that’s OK — there’s no saying that you can’t revisit the idea of a loan three months from now, or six months, or a year.
How Much Money Do You Need?
Realistically, how much money do you need? Applying for a loan is a negotiation, just like any other transaction, but in this case, you don’t always want to get more than you need. While it doesn’t hurt to ask for a higher amount, just as a cushion, you can’t go overboard. The more information you can present to the loan officer, the better.
For example, say you’re comparing the best private student loan options. When you’re ready to apply for that student loan, prepare a spreadsheet that details the major you’re interested in, the classes you want to take, and the total tuition along with a breakdown by class and fees. You can even estimate how long it will take you to finish school and present data that explains how long it takes a recent graduate in your field to land a job. You can do that with virtually any loan, whether you need it for school, a new car, or a home renovation.
What’s the Monthly Payment?
Budgeting for the monthly payment you can afford is crucial. Try to calculate a rough estimate as you put together your loan plan. Go over your current monthly expenses and your paychecks. Take a look at how much comes in and what goes out every month. Is there enough left over for a loan payment? Will it cause you to pinch pennies too tightly?
Once you figure out how much you can afford, you still have to factor in the interest rate. You can’t calculate the exact rate yourself, but you can Google the subject and tally up your total costs based on that. It gives you a basic idea of both your monthly payments and the length of your loan.
These are the three most important questions to ask before taking out a loan — any loan. How do you approach this process? What’s the best rate you’ve ever had?