5 Questions you should answer before applying for a Loan
As discussed in our previous article, applying for a loan can be great for your business. When used prudently, a loan can help you achieve set financial goals. However, taking out a loan isn’t something you just wake up and do. Like most decisions you will take as a business person, you will need to think hard and long. You will literally be going into debt when you take out a loan, so you have to make sure you are on top of it.
As your trusted lender, we have come up with the top five questions you should ask and answer before taking any loan.
- What do I need the money for?
Having a tangible reason to get a loan is the first and perhaps the most important thing you should consider when applying for any loan. Ask yourself, “What do I need the money for?” Ideally, your loan should go into necessities and not just a random want. Getting loans for such things as the purchase of items vital to your business’s production or expansion to a new niche can be a smart choice. On the other hand, using loans to fund the purchase of luxury items like sports cars, jewelry, wedding rings, and even smartphones can be pretty bad.
- How much do I need?
You need to be sure of the exact amount you need to borrow. It can be tempting to take out a big amount, but remember that the bigger the debt, the harder it may be for you to pay back. Notwithstanding, the amount should be primarily calculated based on how much money you need to fulfil the “need” you want to get the loan for. If you would be getting the loan for a business need, add up all of the potential costs, then deduct whatever amount you can provide from your own pocket. This will give you an estimate of the right amount of money you should borrow. NEVER take out more than you need.
- Will I be able to pay back the loan?
Never take out a loan you are not 100% sure you can pay back at the specified maturation time. Apart from the risk of ruining your credit history when you fail to pay back the loan at the agreed deadline, you may also incur late fees and possibly have whatever collateral you submitted sold. You may even be sued to courts and be at risk of getting jailed. To determine if you can afford to repay a loan fully, take a look at your current financial capability. If you have one or more debts, you’re currently servicing, or if your monthly income is lower than your monthly expenditure, you may be better off considering other means of funding other than borrowing.
- How long can I comfortably take to pay back the loan?
What loan tenure do you consider the most ideal for you? If you’re offered a monthly repayment option and are unsure if you would meet up, it may be a great idea to reject the loan offer or negotiate for a longer deadline. However, have it in mind that the longer the loan deadline, the higher the interest rate, and the bigger your debt.
- Should I go for a secured or unsecured loan?
Applying for a secured loan means you have to submit some form of collateral when applying for a loan. Usually, this type of loan is easier to get and tends to have a lower cheaper rate. On the flip side, an unsecured loan does not require you to submit any form of collateral when applying. Typically, such a loan is considered based on your creditworthiness evaluated using your credit history with your bank. This may be an option if you’re interested in applying without putting your collateral against the loan. However, you may find it challenging to have your loan application approved if you have a bad credit history.
THE BOTTOM LINE
Loans can be a lifesaver, but they can also be an unnecessary risk. As such, it’s pertinent for you to honest when answering all the listed questions.
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