Whether you're a homebuyer purchasing your first home, a student funding your own education or wanting to buy that car you've always dreamed of, if you're like many Americans, you probably don't have all the cash you need to make the purchase—you need a loan. Taking on debt can be a big responsibility. You are committing to paying money back within a certain timeframe, plus interest. Borrowing money will affect your future finances and quite possibly your lifestyle. Before you sign on the dotted line, take a look at our list of questions to ask yourself before taking out a loan.
General Loan: Ask Yourself
- Do I really need to make this purchase now?
- Rather than paying interest to get what I want now, should I postpone the purchase and save the money to buy it outright?
- Can I purchase something less expensive and still meet my basic needs?
- Can I truly afford the payments?
- What will I be giving up to make this purchase...vacations, morning coffee, peace of mind?
- How fast can I pay it off?
- Will I be able to save while taking on this debt?
- What happens if I can't make my payments?
Mortgage Loan: Ask Yourself
- This is a big purchase, is my job secure?
- How is my credit? Do I need to do any clean-up?
- Do I plan on living in the home for many years or only a couple?
- Should I get a fixed rate loan, adjustable rate loan or combination of both?
- If I don't have 20% down, can I afford to pay private mortgage insurance (PMI)?
- Have I calculated my mortgage payment, property taxes, Homeowners' Association (HOA) fees, homeowner's insurance and other monthly and yearly costs associated with owning a home?
- Do I have money for closing costs?
- Do I trust my lender? Should I get a second opinion?
- How much of the interest is tax-deductible?
Home Equity Loan: Ask Yourself
- Can I afford both my mortgage and the monthly payments of the home equity loan?
- Am I using the funds for something important, like making improvements to the home or my child's education?
- Do I understand all of the fees associated with the loan?
- Is there a prepayment penalty?
- Is the interest tax-deductible?
Auto Loan: Ask Yourself
- Is my rate reasonable?
- What fees am I paying?
- Can I afford the auto insurance on this vehicle?
- How reliable is this vehicle? Will I need extra savings for repairs?
- Should I improve my credit to get a better rate?
- Is there a prepayment penalty?
Student Loan: Ask Yourself
- A poor credit rating can adversely affect my student loan application. What can I do to improve my credit?
- Am I going to make enough money at the job I hope to have in order to make the loan payments once I graduate? What is the starting salary?
- I don't want the interest to accrue while I'm in school. Is my student loan subsidized?
- Can I get a part-time job or second job to help pay expenses?
Payday Loan: Ask Yourself
- Payday loans can get expensive because if they're not paid back relatively quickly, fees can add up. Do I really need the money?
- Is there a less expensive way to borrow the money? A friend or family member if it's just for a short period of time?
- Do I understand the terms: the fees, interest rate and repayment period?
- Can I repay the loan in this short amount of time?
- Is this becoming a habit?
401(k): Ask Yourself
- I'm borrowing against my future retirement, am I sure I can pay it back?
- If a 401(k) loan must be paid back within a short time (often 60 days to avoid penalties and taxes) what are the consequences if I am unable to make the payments?
- Is there a loan initiation fee and/or an annual service charge?
- Is there an alternative to a 401(k) loan (such as a student or home equity loan if being used for college tuition or Private Mortgage Insurance if being used for a down payment)?
- Can I still contribute to my 401(k) plan and get my employee match?
Personal Loan: Ask Yourself
- Do I really need the money?
- Is there a less expensive way to borrow the money?
- Am I getting the best rate and terms?
- Is there a prepayment penalty?
- Is there a monthly fee?
