In life there are times that you need to take out a loan. Often one needs a loan to make a bigger purchase like a car or a home. Occasionally one may even need to take out a short-term loan for an emergency. Most of the time this process a positive one. You get the money you need and pay it off over a period of time, with a monthly payment you can afford. In the process, you build or help to repair your credit score. If things go wrong however, it can be very bad for your financial future. Here are 4 of the most common mistakes people make when taking out a loan…
Mistake #1: Not Shopping Around
One of the most common loan mistakes is taking the first loan that comes along. The first loan you see advertised may not have the best terms or interest rate available. Shopping around for most important purchases is a smart move and loans are no different. Look at multiple loans and compare the terms, then make a decision based on what makes the most sense for your current situation. You may be in this loan for a while so even the slightest difference in the interest rate or fees can make difference on how much you will ultimately need to pay back.
Mistake #2: Not creating a Budget
Unfortunately, there is no free lunch. When you borrow money from a financial institution, you need to pay it back or else there can be serious consequences. It’s important to create a budget before you borrow the money to make sure you can pay it off on time. If you fail to make your loan payments in a timely fashion, could result in the loan getting much more expensive and it could do some real damage to your credit score. You may even want to consider budgeting more than you need. Often expenses come up that you don’t expect, plus you can always save money on interest by paying your loan off early in most cases.
Mistake # 3: Not Prioritizing Your Finances
If you set your priorities, it can be a lot easier to manage your finances in general. Paying off outstanding debt, especially loan or credit card debt should be pretty high on the list of priorities, just under the necessities. It’s important to realize that failing to pay back a loan can drastically affect your credit score and therefor your whole financial future. If you fail to pay back debt now, you may not be able to land that perfect apartment or get into a decent car payment down the road. People often talk themselves into little purchases they don’t really need and all those little purchases can add up big overtime, making it difficult to keep your finances on track. By prioritizing your finances, it makes it easier to say no to that extra pair of shoes, that cool item on QVC or that expensive night out you can’t actually afford. Buying those things may feel great now, but overtime it can detail your money situation.
Finally, make sure you are only taking out the amount you need and can afford to pay back. Many times people take out more than they actually need and then struggle to pay it back. Once you start making late payments, there is a snowball effect. Also keep in mind that the more you take out or the longer the term, the more interest you will end up paying over all. It can seem like a good idea to take a little more out for living expenses or that awesome gaming console you’ve been dreaming of but this pretty much always a bad idea. You’ll end up paying way more for those items when you add up the interest involved.
Mistake #4: Taking out More Money Than You Need
Be wise when it comes to taking out a loan and consult a financial advisor if you need advise. Mistakes happen but try not to make one when taking out a loan, it could be very costly.