Taking out a loan is not one of those simple and easy decisions in life. It requires meticulous research, financial consults, and figuring out when is the best time to take it out. Determining when is the right time to take out a loan might be the hardest one of all of the aforementioned tasks, which is why it’s discussed in full down below.
Depends on the Purpose of the Loan
The most critical factor you need to consider before taking out a loan is knowing why you need to borrow money, to begin with. Borrowing money is a huge financial step, and it can either help you or hurt you – depending on how you manage this process. Knowing the main reason behind your loan needs will also help you determine when is the right time to take it out. According to some surveys, almost half of the consumers took out a personal loan to cover bills.
Taking out a loan to pay for medical bills, a dented car, or any kind of emergency payment is never ideal, so if you have at least a little bit of savings, maybe try putting the loan off. If you want to indulge yourself in an expensive gift, and you’re stable financially, by all means, the time is right. Of course, you could always wait out some period once you get enough savings, but if you have no previous loans, you’ll be good to go.
When the Time Is Right
Other situations when the time is right to take out a loan include situations where you have to pay off other high-interest debts, to improve your credit score, and if you want to indulge yourself. No matter what the reason, you should still sit down and figure out what is the ultimate purpose of that loan, if there are any penalties, what will the interest rate be, and how you will be able to afford to finance it. Unless you’ve revised all of these aspects, don’t go any further. If you have, we’ll now discuss these three situations in-depth as they are the most common reasons why people take out a loan.
Paying Off High-Interest Debts
Though a personal loan might be more expensive than some other types of loans, it isn’t necessarily the most expensive option. For example, if you have a payday loan, it is likely to have a much higher interest rate than a personal loan from a bank would. Moreover, if you have some residual personal loans with a higher interest rate than you would qualify for today, simply replacing them with a new loan could save you plenty of money. However, before you do, make sure that you find out whether there are origination fees or prepayment penalties on the old loan or application because these fees can often be substantial.
Loans to Indulge Yourself
If you’re financially stable and want to indulge yourself with a new house, vehicle or vacation, taking out a loan is perfectly okay. More often than not, people aren’t aware that they can take out a small loan that will provide them with a car, boat, or a trip they will cherish and that will bring them everyday joy. Nowadays there are many boat loans, car loans, and even round the world trip loans that can make this indulgence possible. Taking out a loan to help you out when you’re financially stable for things that will bring joy to you is never a bad idea.
Improving Your Credit Score
Another great situation when it’s the right time to take out a loan is when you want to improve your credit score. Taking out any kind of loan and paying it off promptly can significantly improve your credit score. This is especially true if you have a history of missed payments on some other debts.
When your credit report shows mostly credit card debt, adding a personal loan might also help with your “credit mix” as well. Having different types of loans, and showing that you can handle each one of them responsibly is considered a plus for your score. In addition to this, having a great score can prove to be highly beneficial for years to come when you might need it.
By now it’s become clear that some of the most common situations when the time is right to take out a loan are to pay off high-interest debts, to indulge yourself, and to improve your credit score. If you want to indulge yourself there are certainly many types of loans ranging from car loans to boat loans which can not only get you that joy in life but can also diversify your “credit mix”.