Everyone needs to opt for loans sometime or the other. However, it is important and would be a good idea to ask yourself, a few questions before opting for a loan. Questions that would clear your doubts and help you understand whether you need a loan.

Let us concentrate on the questions that you must ask yourself before availing of a loan.

Why do I Need a Loan?

This should be the first question you should ask yourself. If your purpose of taking a loan is to create an asset for yourself like building a home or adding to your educational qualification or learning new skills then it is perfectly alright to avail loan to pay for that purchase. Always remember asset is something that enhances in value and pays dividends or generates income in the long run.

However, if you want to avail of a loan to cover some personal expenses which might be beyond your means then it wouldn’t be a good idea to avail of a loan. However, in the case of utilitarian loans like those taken for purchasing a car one might go for it provided he finds a reasonable interest rate. However, it should be strictly on a need basis.  

Do I Understand Debt to Income Ratio (DTI)?

It is important to understand that DTI is the part of one’s monthly (net) income that is spent on EMI payments. It must be understood that EMI is reached by dividing the loan capital + the interest over the tenure of the loan. One must ask himself how much EMI they would be required to pay for the loan. If the ratio is less than 30-40% then opting for the loan would be a good idea.

Should I Opt For Credit Card Loans?

Credit card borrowing should only be opted for when you are confident of repaying it in full by the end of the monthly cycle. One must not forget that a credit card loan is one of the most expensive loans with an interest rate of 35-40% annually. However, if one can use it responsibly then a credit card loan can help in building a good credit score that can prove to be useful while applying for other loans. So, always ask yourself the question that whether you would be able to use a credit card loan judiciously. If the answer is yes then a credit card loan can prove to be a good option. 

Will I Fall into the Debt Trap?

If you are planning to avail loan to clear your existing loans then be cautious for it can become a vicious cycle and should best be avoided. Some of the early signals that give a hint that the borrower is falling into a debt trap are a high DTI ratio (more than 50%), maxing out on the credit card limit constantly, several outstanding loans, and inability to save money every month.

You must ask yourself the question of whether you would fall into the debt trap by opting for the loan and if the answer is no then there is no harm in going for it.

Should I Opt For Zero Interest Loan?

There are occasions when sellers offer zero interest EMI payment options to enhance the sale of their products. Such a practice is pretty common for electronic products, home appliances, etc. Zero-interest EMIs presents a wonderful opportunity to improve the credit score provided the loan is repaid on time. However, before opting for the zero-interest loan you must ask yourself whether or not there are any hidden charges and if you are convinced that there are no hidden charges then there is no harm in opting for a zero-interest loan.

Summing Up

Everyone opts for loans. However, if you are planning to opt for a loan then it would be a good idea to ask yourself and be very clear about why you are opting for a loan in the first place. Then it would also be a good idea to carefully think over the loan that you should be opting for and whether you would be able to repay it on time. It is only after carefully observing every point that one should take a call whether or not should he opt for a loan that would be in his best interest.