When does a loan make sense? – What should you pay attention to?On February 17, 2020 by admin
Taking out a loan sounds tempting. But in what situations is borrowing really necessary? Can a loan actually help you make your dreams come true or will it only lead to over-indebtedness? A loan can be considered, particularly for large investments, where equity capital may not be sufficient. But you should know your financial situation well so that you don’t end up in debt. In this article we give you tips on when a loan makes sense and what you should pay attention to.
What is a loan?
“Credit (derived from the Latin credere” believe, trust “and Latin creditum” that entrusted to good faith “English credit or English loan = loan) is generally understood to be the transfer of cash (banknotes, coins), book money or justifiable items by the lender for the purpose of temporary use by the borrower, who is committed to a future repayment and often also to a consideration in the form of interest. ”(Source: Wikipedia on the loan)
This is not just about small everyday amounts that are quickly spent and recovered just as quickly. You always have to bear in mind that the banks also think about their profit. You don’t just pay back the borrowed money, but also a considerable portion of interest over the months or years at agreed rates.
When does a loan make sense?
You enter into a contract with a loan for a certain term. It would certainly be cheaper if you saved the money than taking out a loan.
However, there are many situations in which you cannot or do not want to wait. The question therefore arises when a loan makes sense.
A loan always makes sense if it is well considered and not due to the situation. That sounds trite, but it is true. Do you really need the loan? You also need to determine what loan amount you need. Did you find the most favorable terms for yourself, for example, by comparing the loans? That doesn’t always have to be the lowest rate. Just calculate how much interest you will ultimately pay. You will see that certain providers have very high interest rates, while others have manageable rates.
In what situations can a loan help?
- When buying property: With particularly high expenses, such as buying a house, it makes sense to take out a loan. However, if you want to save the money, you usually incur additional rental costs. The dream of owning a property cannot be realized
- When buying a car or other expensive purchases: A loan can also be useful for buying a car or other quite expensive purchases. But then make sure that the term does not exceed the intended service life of the vehicle or the new kitchen, etc. If you have to make another purchase, you certainly don’t want to pay off yet.
- As a start-up aid for self-employment: It can make sense to take out a loan if it helps them to start regularly as a starting signal, for example when starting a self-employed activity. High investments have to be made there at the beginning.
You can also finance your vacation with a loan, but you should rather look for other options. Here, the bank has no security compared to other types of financing, such as real estate. This in turn drives interest rates up.
So what should you watch out for when taking out a loan?
Since a loan may tie you up for a long time, there are a few important things to keep in mind before you close:
- The most important thing is that you have a secure income for the planned repayment period. A fixed employment contract (in the best case unlimited) is a basic requirement!
- You also need to be clear about what can possibly happen and whether you can withstand the financial burden. Parental leave, expensive training or job loss should be considered.
- When separating from your partner, you should also be able to carry your finances. If possible, do not make yourself too dependent on external factors, according to the motto: everything will be fine.
The following always applies: Just as your income can change, your expenses can also be subject to unfavorable fluctuations. Always leave yourself enough financial leeway and remain realistic when considering your loan.
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