Do You Have the Right Mindset for Taking Out a Loan?

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When people encounter some kind of money-related issue, one of the first things they do is turn to loans. Loans are a fantastic way to pay for emergency expenses, and they can also be used to pay for certain luxuries now and then.

 

Using a loan isn’t necessarily a bad thing if used correctly, but there are very few people who actually approach borrowing money with the right mindset. It’s a surprisingly difficult thing to do, so here are a couple of tips to help you the next time you consider the possibility of applying for a loan.

 

 

Are you taking out a loan for a good reason?

 

The very first thing to consider is the reason you’re taking out a loan. This can usually be split into two camps; good and bad loans. A good loan is when you’re borrowing money for a reason that benefits your future financial situation. For example, taking out a student loan is often considered a good loan because it allows you to prepare for your future, get a better job, and have an easier time finding work. This is an investment into your future, hence why many people consider it to be a “good” loan. You might also hear people refer to this as “good debt” because it’s debt (which is usually considered a bad thing) but it’s actually benefiting you instead of making things worse.

 

However, defining something like a good or bad loan can often be a little vague. If you’re taking out a loan to go on holiday because you really need a break, then is it really a bad thing? When you consider the positives that come with a holiday, you really can’t consider it to be a waste of money.

 

But this is where it’s important to consider the alternatives available. For example, there are usually no alternatives to a student loan because university is a unique path through life that requires money. However, if you’re stressed and feel like you need a holiday, then you need to consider the benefits of a holiday and if there are other ways to get them. For instance, you could go on a small break with friends and family members instead of splashing out for an expensive trip abroad. Similarly, you could always buy something cheaper that gives you a similar level of enjoyment to beat stress.

 

As such, when trying to define good and bad reasons for a loan, you often only need to think about one thing; do I really need this? If you can honestly answer “yes” because there are no other alternatives then there’s no reason to hold back. Apply for that loan, use the money wisely, and reach for your goals. However, if there are clear alternatives to borrowing a large sum of money, then it’s best to find a different reason to take out a loan or just resort to those alternatives that don’t cost as much money.

 

This is usually a great mindset to have when it comes to borrowing money. In fact, you can end up boiling it down to the simple question of “am I being greedy?”. If you believe that you are and are taking out a loan for poor reasons, then it’s a good idea to hold yourself back and consider the financial consequences of a loan.

 

 

So you’ve decided a loan is necessary, now what?

 

If you’ve done some pondering and have arrived at the conclusion that you can benefit from a loan and there is no alternative, then what do you do next?

 

Perhaps the very first thing you should be doing is looking for lenders. There are a number of ways to get low-interest loans, green loans, and even loans with short repayment terms if you’re looking to pay it back as soon as possible. Finding the right lender can be tricky because there are so many different options and each of them will evaluate your financial situation differently. Some companies will offer you a great interest rate because you’ve got a good credit history, but others might favour you because you have a bad history and they’re advertising services to help you rebuild your credit rating.

 

As such, it can be daunting to choose the right lender. We always recommend working with financial experts if you plan to borrow a large sum of money, or going for common options such as speaking to your bank.

 

Being diligent about repaying your loan

 

Repaying your loan on time should be a top priority to avoid late payment fees that could negatively impact your credit history. If you want to ensure that you’re always in a good financial situation, then make sure you focus on adopting a frugal lifestyle and working extra hours when possible to pay more than the minimum each month. This sounds like obvious advice, but it’s important to continuously remind yourself of this importance. Don’t underestimate how easy it is to lose track of your savings and miss a payment date or two.

 

Being diligent about repaying your loan is important. It helps to establish good financial practices that will stick with you later on in life. If you’ve yet to take out a mortgage or a large loan such as for a vehicle, then you’d be wise to focus on paying your loans back and developing good financial habits early on.

 

A good way to start doing this is to just keep track of your budget. This starts with tracking your expenses and understanding how much money you get from all sources of income. It’s not hard to start up a spreadsheet and record all of your expenses, and it’s even easier now that we have access to a plethora of smartphone apps to help us keep track of our spending. Budget management is a great skill to have and will be a huge step in the right direction when developing a healthy financial mindset.