Risks of borrowing money: 5 things to consider before taking out a loan

Risks of borrowing money

It seems easier and easier to get a loan: for a home, a new car, college, home renovations, or even to start a business. They offer you credit cards, payday loans, tax advances, and many other options. Getting money when you’re tight can be a big help, but it doesn’t come without risk. Take a look at the following dangers associated with lending money.

1. Interest

When you ask for a loan, you will always have to pay back the original amount that is lent to you (called the principal), plus interest, which is a percentage of the money that is lent to you. Sometimes they even charge you a loan processing fee. There are credit cards that offer very low interest, 0%, but possibly, if you forget to make a payment, the interest is very high, so you have to be careful to always pay on time. 

Also read: ▷ Money What is it? What utilities does it have?

Always make sure you read every part of the contract you sign, and that you understand absolutely everything. 

2. Credit score

Every time you decide to borrow money, you run the risk of damaging your credit score if you don’t pay as agreed. Now, if you always make your payments on time, a loan or credit card can help you build your credit score. 
A good idea is to know what your score is, and understand how to improve it. This small number will affect many aspects of your life, and it is important to know about it.  

3. It affects relationships

While you may have a friend or family member who can lend you money, taking a loan from them can lead to a number of awkward situations. It can be difficult for that person to ask you for the money back, and you may even feel guilty or obligated to pay it back every time you see that person. 
Although this method can help you a lot, a good idea is to have clear rules about how and when the payments should be made. 

4. Feeling trapped

Taking money from a lender requires signing an agreement and agreeing to pay a certain amount each month. After that, it’s important to make those payments on time. 
This means that when taking out a loan, you must anticipate and think about the future, since today’s situation may be different from tomorrow’s, but the loan payment must continue until the debt is paid off. Make sure you can make those payments, not just today but for as long as you’re committing. 

Also read: How to make money building and renting vacation homes

5. Less flexible budget

Lastly, the money you must pay back to the lender will limit the amount of cash available in your future income. During the term of the debt, there is money that will go away each month to pay off the debt, leaving you with less money each month

There is no doubt that borrowing brings many benefits, such as buying a house, or a car or paying for a children’s university, but the most important thing is to understand the conditions that one is going to submit to during that time, and really evaluate How much can one borrow? Many times the lender will tell you how much they can lend you, but that doesn’t mean you should take it all. Remember: only take a loan for what you think you can pay, not what they tell you. 

And, of course, it’s always cheaper to use savings instead of going into debt.

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