Many of us apply for a loan at some point or the other in our lives. The reasons for doing so varies; for instance, you may need a loan for a car, for home improvements, or perhaps you have an unexpected expense that you need to cover. When you do not have the savings to hand, and you have exhausted other options, getting a loan could be your best bet. But, it is not a decision you should take lightly, and you really should do your research.
So perhaps you are currently facing this decision – whether or not to apply for a loan. Wonga, a popular South African loan provider, says there are 3 questions you should ask yourself before settling upon a loan. These can really help you to judge how much you actually need this loan:
- What do you need the money for?
- How much is the loan?
- How much will it cost you overall?
Asking yourself these 3 questions, and answering honestly, is a good way to see how ideal the loan would be for you and your finances. The first question can help you to put things into perspective. For instance, if the loan is just for a holiday, perhaps that is not the best use of credit. Do you really want to take out a loan just for a holiday? Perhaps if you answer with ‘education fees’ this may be more worthwhile – the education you will receive will outweigh any debt that you incur now. The second question helps if you answer it out loud – say those numbers to your partner or friend and see whether they make you shudder! If you say a high figure, that might make you feel it is not worth it, because remember, you’ll be paying this loan back for a while. Perhaps the amount you need seems like a reasonable amount, and if you pass this question, swiftly move on to the third. The final question allows you to calculate the overall cost INCLUDING interest. This can really help you to figure out how ‘worth it’ that really loan is. Use the online calculators to figure this out, because sometimes you can be taken aback by the amount of interest you need to pay on the original loan amount. Also, as the Money Advice Service suggests, you might not get the APR advertised as it depends on your credit rating. You should check the terms and conditions carefully before you accept the loan.
If you get through all three questions and still feel you are reasonably able to apply for this loan and can justify the reasons, then you have been financially astute enough to make this decision. Being financially literate is key when making these ‘adult’ decisions. Too many people take out loans to pay off loans, or loans for the wrong reasons, and end up in a cycle of debt that can affect every part of their life – from relationships, to jobs, to mental health and so on.
Wonga also suggest in this post doing your research when you take out a loan. This might mean that you compare the cheapest loan interest rates in South Africa, to see how much of a good deal you are really getting. Don’t just plump for the first one you find. You will of course only want to use a reliable provider, and not a loan shark. Loan providers that are properly vetted will conform to all legal standards and will work with their clients appropriately, rather than using intimidating tactics to get the loan repaid.
Overall, applying for a loan could be considered easier now than what it used to be traditionally – as many applications can be made online, rather than having a meeting with the bank manager and filling in lots of excessive paperwork. Despite this, it should not be a decision you make lightly – and those three questions we spoke about can really help in supporting your decision making process.