What to Know Before Taking Out a Loan

Unfortunately, debt has become far too common for many people. A recent analysis of the latest Federal Reserve data showed that total U.S. consumer debt is on its way to exceeding $4 trillion this year. It showed that Americans collectively owe more than 26 percent of their monthly income on consumer debt. This can include car loans, credit card accounts, and student or personal loans. 

The best way for a person to stay out of debt and ensure financial security is to live within their means. However, there come circumstances in which they may need to take out a loan. In doing so, it is important to be well informed in order to know if this is the right choice for them.

What is a Loan?

A loan is a sum of money, property, or other material goods that is borrowed from another party. This can include a financial institution such as a bank, credit union, or online lender. Loans can also be taken from another person such as a family member or friend. This is done in exchange for future repayment of the loan value or principal amount in addition to interest or finance charges.

Questions to Ask Yourself

Taking out a loan is a serious business and should not be done lightly. It is because of this that it is important for you to be sure that you are ready to do so. When considering a loan, begin by asking yourself the following questions:

  • Can I afford the payments? Depending on your income, some lenders may pressure you into the wrong loans. It is important to look out for this and do not take out a loan that exceeds your ability to repay. If the loan is for a house, your housing payment generally should not exceed 30 percent of your gross income. 
  • How close am I to retirement? There can be long-term consequences of taking out a loan. Unlike in the past, most people these days are expected to live decades after they decide to step away from work and retire. It is because of this that it is important to prioritize contributions to a retirement plan over certain whims such as vacations. 
  • Can I wait to take out the loan? Paying with cash for certain purchases can help you to avoid interest charges and spend less money in the long run. A shady lender may be willing to offer you a loan for material objects or vacations, but it can have a negative impact on your bank account.

Contact our Firm

Werdann DeVito LLC is an experienced Certified Public Accountant firm serving clients throughout New Jersey with all of their financial needs. If you need quality assistance with accounting, tax, or consulting services, contact Werdann DeVito LLC today.