A loan can help you make huge strides financially and within a very short time. However, without proper planning, a loan can also ruin you. So, how do you make sure that a loan doesn’t turn into a burden for you? What you need to do is plan ahead. To stay ahead, here are 6 steps that you need to consider when applying for a new loan.
- Your income stability
Before you make the move to apply for a new loan, do a realistic analysis of your income. If your income is unstable, don’t take out a new loan because you may not be able to make on-time payments to pay it back. Find ways to stabilize your income first, and also settle any other loans you have. Rushing to take a new loan without a stable income can destroy your credit score.
- Consider consolidating your loans
Taking new loans on top of existing ones can be stressful. Not only is it costly, but the different loan repayment dates can also lead to missed repayment dates, which can hurt your credit score. To deal with this challenge, consider taking a consolidated loan. You can use a loan payoff calculator to determine the cost savings from taking a consolidated loan.
- The purpose of the loan
One of the biggest mistakes most people make is to take a loan for the wrong reasons. Unless you are taking a loan to build or expand an income generating venture it is best to avoid it altogether. That’s because when you take a loan for consumption, you bear the full brunt of repaying it out of pocket, and this can hurt your finances.
- Your debt-to-income ratio
Before you move to take a loan, ensure that your debt-to-income is low enough, preferably under 50% of your income. That’s because there are risks that arise when a huge percentage of your income goes towards loan repayments. For instance, with a high debt-to-income ratio, you might unable to deal with emergencies when they happen, and that’s not a risk you would want to take.
- Your credit score
Before you sign up for a loan, seriously consider your credit score. If it’s already bad, don’t take a loan that could potentially make it worse. At that point, what you need is to find ways of paying existing loans, and make it better. On the other hand, if your credit score is good, don’t take a loan that can mess it up. When your score is good, only take loans you are sure you can repay, or if it’s absolutely necessary. That’s because a good score can help you at a point when you need a loan most, such as when an opportunity arises.
- Consider taking financial education classes
Before you take a loan, consider taking basic financial literacy classes. This can give you a better understanding of how to handle your loan, and protect yourself from falling into a debt trap. Besides, such education can help you figure out ways to make some extra money, and avoid the loan altogether. It can save you lots of heartaches in the future.