In general, you’re advised to avoid going into debt as much as possible. Sometimes, though, taking out a loan is a necessary part of life, whether for an emergency or necessity. If you’re thinking of taking out a loan, make sure that you fall into most (or preferably all) of the following categories:
Your purchase is essential, not frivolous.
Before you consider any of the other factors on this list, think long and hard about the reason that you are thinking of taking out a loan. Is it worth going into debt and committing to principle and interest payments for your purchase? If the reason for your loan is necessary, go ahead. On the other hand, if you can wait, consider setting up a savings account and waiting until you have enough in the bank to cover your needs without a loan.
You can afford the payments.
This one should be obvious, but it is always worth mentioning when talking about taking out a loan. When you’re thinking of borrowing money, make sure that you can afford the payments. This is true for any type of debt – mortgages, car loans, student loans, even loans from friends and family. If you can’t afford the payments for a loan, consider talking to a financial advisor about your other options.
You can pay off the loan early.
Sometimes you know that you have money due to you (like a bonus or commission), but need to make a purchase before the money reaches you. In this case, you can take out a short term loan to buy what you need, and pay off your debt as soon as you receive the money that you are due.
There are two major considerations in this situation. First, you must be 100% sure that the money due to you is coming. The last thing you want to do is count your chickens before they hatch and end up stuck with a loan when your windfall falls through. Also ensure that the loan you take out doesn’t have any prepayment penalties.
You have a good credit score.
People with good credit often get better deals on loans. If your credit score is above 720, you will typically be eligible for a loan with lower than average interest rates, meaning that you will pay less in interest over the life of the loan. Just make sure that you keep your credit score high by making your loan payments on time!
You qualify for a specialty loan.
There are many types of specialty loans available for specific groups and events. We couldn’t possibly list all of the specialty loan types, but the most common include loans for Home Buyers, Education, VA loans, and USDA loans. These specialty loans often have favorable repayment terms that make carrying a bit of debt worth the risk.
If you want to talk to a professional about the implications of taking out a loan, and get personalized advice about your financial situation, talk to a Vargas and Vargas Insurance Agency Financial Planning professional. As always, you can call 617-298-0655 for more information!