5 Questions to Ask Before Taking on Debt
January 17, 2025 | Posted by: Sherry Corbitt
Debt is a financial aspect that most of us encounter in our life. Although it cannot always be avoided, you can limit how much you take on. Consider five questions to ask yourself before you decide to take on any additional debts.
What is the Purpose
This should be one of the first things you consider when contemplating getting into more debt. People may have different opinions on what is important enough to take on debt for. Yet financially speaking, some debts can be considered more important than others. This can include student and mortgage debts. In addition, some things you may want, such as a new vehicle or renovation updates, may not be practical in your current financial situation. Yet before going into any debt, no matter what kind, make sure you analyze the importance of the purpose yourself. This should not be based on anyone else, yet solely on yourself.
What is the Repayment Term
Getting money at the moment may seem significant, yet it is vital to remember that you will need to pay it off sooner or later. A fundamental aspect that many overlook is the repayment term of the debt. All debts are different, especially regarding the type and amount, so each debt will have its specific term. Before you go into a new obligation, speak with a financial advisor at your bank. They can give you practical advice on what type of repayment term you will be looking at. It may or may not be shocking to you, depending on how often and high the payments will be. However, having a clearer picture of your repayment term will allow you to make a more balanced decision on whether or not you should take on additional debt.
How Long Will it Take to Repay
Although you may have a better idea of your repayment term, you should look at the big picture of the debt. This involves knowing exactly how long it will take to repay this entire debt. This knowledge will help you realize how much interest you will need to pay. The longer it takes to pay off this debt, the more interest will accumulate. If it takes a long period of time, then you will be stuck with a large interest fee to pay. To avoid unnecessary interest payments, double-check with your payment term schedule. From this, you can get a better picture of how long it will take to pay off. Even before going into debt, you can accurately know what your interest payment will look like.
How Will My Credit Be Affected
Debt can do some serious damage to your credit score. It can be more severely damaged if you have various high debts which have not been paid off for years. Adding on any additional debts can take a massive strike at your credit. Although you may think to yourself, 'it's only one more debt,' think again. If you already have an adverse credit history with debt, adding more could be your score's breaking point. It could take a massive descent, which can take months to years to regain again. First, analyze what your current score is and what existing debts you have. Also, look at your past debt history, and from there, you can decide whether or not you can take it on and maintain a healthy credit score.
Which Lender Will I Use
Depending on the type of loan and how much it is, you may or may not have many options for finding a lender. For some people, they solely focus on getting the loan money. Yet this can be a big mistake, since you could end up paying much more for the first lender you come across. Although a lender may seem great with the loan amount and service they provide, you need to analyze the fine print, which includes hidden costs and fees. Without even realizing it, you could be spending hundreds on payments you did not read up on. Before settling for the first lender that accepts you, ensure that you do your research. Look into different possible lenders and resources. Before you choose to take on this debt, completing this step will save you much in the long run.
Taking on more debt is undoubtedly a personal factor. Yet before you do so, ensure that you ask yourself the fundamental questions of whether or not you should take more on. By doing this, you can stay financially secure. I am your Mortgage Broker for life – so reach out and let’s discuss. My advice is always free, and I’d love to hear from you.
Sources
Barrington, Richard (2021). 9 Questions to Ask Before Taking on Debt. Money Rates. Retrieved from https://www.moneyrates.com/credit-card/questions-ask-before-taking-debt.htm
