Taking on more debt is a big decision. Not only can it impact your finances now, but it can and often does have a significant impact on your finances in the future. Consumer debt has been steadily increasing through time, thanks in part to the introduction of the credit card in the 1950s. With this in mind, understanding what kind of debt you are taking on and whether it is in your best interest or not is essential. The next time you are considering making a big purchase on credit, you should consider the 6 most important questions to ask before taking on debt.
Are you considering taking on new debt?
Taking on new debt is always a big financial decision. Whether you are considering opening up a new credit card, taking out a personal or car loan, or even purchasing a new home, these new debts will impact you financially. These impacts can be both positive or negative, depending on what kind of debt you take on and your financial well-being. Before signing up for new debt, you need to consider what the impacts of the debt can be and whether you have the finances available to service the debt successfully.
The 6 most important questions to ask yourself before taking on debt
If you’re already in debt in some way, shape, or form, it’s a good idea to consider the consequences if you take on even more debt. It’s important to keep your spending in check and only purchase things you can afford. Here are some questions to keep in mind when contemplating new debt.
1. How much debt do you currently have?
Before you take on any new debt, it’s essential to sit down and determine how much debt you currently have. If you already have a significant amount of debt to your name it may not be a good idea to add even more. The higher your debt levels are the more you are going to end up paying in interest and the higher your chances are of getting into financial distress down the road. If you have a low level of debt and you can easily fit repayments and interest charges into your budget, taking on new debt may be a feasible option.
2. Can you afford the repayments of the debt?
If you are looking to make a large purchase such as a car or a new home, it is essential that you are aware of the repayment amount and how much of your income it is going to
encompass. If your new car loan is going to take a significant chunk such as 30 or 40% out of your income, it may be too much for you to comfortably afford. Debt repayments that are too high can seriously impact your ability to pay for other essential expenses and can make meeting your everyday expenses incredibly difficult.
3. Are the repayment terms favourable for you?
Every loan or debt that you take on is going to have payment terms that determine how long you have to repay the credit and how much you are required to pay at a time. Understanding the different repayment terms and how they can impact your finances in the future is essential. While it may be tempting to take the offer that pays off your debt in 6-months’ time, the amount that you have to repay is going to put an exponential amount of stress on your finances. Taking the time to understand what repayment terms are best for you and your finances is important.
4. Are there other lenders offering a better deal?
Getting approved for a loan or credit card is exciting. You can see your big purchase within your grasp, and it might be tempting to take the first contract that is offered to you.
However, this first offer might not necessarily be the best offer. Sometimes, sitting back and waiting to see if you are offered a better deal from a different lender is a good tactic. You could be offered a better interest rate or better repayment terms.
5. Will this new debt hurt your credit score?
Applying for new credit such as personal loans or credit cards too often can hurt your credit score. Applying for credit too often and too close together can indicate to potential lenders that you may be facing some financial issues. Not only will they be unlikely to lend to you but every enquiry in your credit report is going to cause your score to lower for a period.
Before taking on new debt or applying for new lines of credit, always be sure that your actions aren’t negatively impacting your credit score.
6. Will this impact your ability to pay for future needs?
Finally, it’s always a great idea to consider whether taking on new debt will impact your ability to pay for future needs. If taking on extra debt now is going to stretch your finances thin in the future, it may not be the best idea to move forward. Taking on too much debt and increasing your commitment levels to the point that you will be unable to meet future expenses that could pop up is never a good idea. Ideally, you should have enough breathing room in your budget that you can afford unexpected expenses, even with your debt payments and living costs.
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Understanding how debt can impact your finances is key to keeping your budget and money in good order. Considering these simple questions before you take on more debt can help you avoid over-committing yourself and help you keep your debt levels under control. If you are looking for information on budgeting or finances, keep reading our blogposts.
Are you considering applying for a small personal loan or a payday loan? Submit your application here (https://www.breezyloans.com.au) and our team will get back to you soon.