7 Questions to Ask Yourself Before Applying for a Loan
Is debt a good or bad thing? Depends on how you manage it and what you use the money for, it can help you increase your net worth or become a source of stress and misery. That is why it’s important to evaluate your current financial situation and think of your future capabilities before taking out a loan.
Whether it’s to take out a home loan, purchase a gadget in credit card installments, or borrow a cash loan for home repairs, there are a few questions to ask when taking out a loan.
So before you contact your lender, here are 7 things to take note of:
1. What is the loan for?
Are you taking out a loan to help you achieve your business or money goals? Is it for a significant and expensive item for your home? Is it for a vanity purchase? Is it to help consolidate other debt? Identifying the reason can help you decide whether you need to take out a loan now or simply save up for your purchase later on.
Related: How to Apply for SSS Calamity Loan
2. Do I qualify for the loan?
You can save time and heartache by first looking into the factors that can affect your eligibility before you apply for a loan. For example, Pag-IBIG will first have to investigate the length, consistency, and total amount of your contributions, your capacity to pay, whether or not you have co-borrowers, and the loan-to-appraisal value ratio of the property you’re eyeing before they let you apply for a housing loan.
3. Does this loan need collateral?
In simple terms, secured loans require collateral before releasing the funds but typically come with lower interest rates. Unsecured loans don’t require collateral but typically come with much higher interest rates because of the risk factor.
Before you use your property or valuables as collateral for a loan, weigh in the risks vs benefits first. Remember, if you default (that means unable to pay back the loan) you will lose your asset.
If you truly need a loan but are not as confident with your ability to repay, there are plenty of legitimate institutions that may lend you funds for higher interest. However, if the need isn’t dire, you may want to hold off borrowing until you are more financially stable.
4. What are the fees and penalties that come with the loan?
While most people focus on the principal amount + interest rate, some loans may actually have other fees (closing fees, origination/upfront fees, etc) and penalties that you need to factor into your budget. All of these can be found in your contract so always read the fine print and ask plenty of questions before signing anything!
5. Can I afford to pay back the loan?
Speaking of budget, you must first see if your finances can accommodate paying back a loan with allowance for penalties. As a rule of thumb, only borrow what you can afford to repay without having to sacrifice essentials.
Let’s say you want to get a new phone on P1,500 monthly installments for 24 months (inclusive of interest). Apart from this amount, you must also factor in penalties into your budget in the event that you miss a payment. Home Credit, for example, has a compounding penalty structure on that goes like this if you miss payments:
- Penalty any time after your due date: + Php 200
- Penalty 30 days past due: + Php 400
- Penalty 60 days past due: + Php 600
- Penalty 90 days past due: + Php 800
Remember that these penalties go on top of your regular repayments so be sure to always pay on time! With your Coins app, you can skip the long lines and pay your Home Credit loans straight from your phone!
6. Is the lender asking anyone to co-sign with me?
When loaning for big-ticket items like homes and cars, some lenders may ask you to get your spouse or family member to co-sign as a guarantor or co-maker. When this happens, the person who co-signs now becomes an insurer of your debt or solvency, depending on what capacity they are signing for. Before you enter anyone into your loans, be sure of your ability to pay even beyond passing as these things can create tensions among loved ones. We say beyond passing because, in these contracts, your co-maker or guarantor will become responsible for repaying your debt and/or balance in the event of your passing.
7. Is the lender credible?
It may seem easier to borrow from a loan shark but on the side of the borrower the cons outway the pros. Loan sharks are considered illegal lenders in the Philippines. While they provide quick and easy access to funds, many people can end up bankrupt with astronomical interest rates, no-contract loans, and no formal records of repayment. Worse, some are threatened with harassment or violence upon missed payments.
Be sure to borrow only from legitimate lenders like banks and other financial institutions. This way, you know your interest rates will be fair and that they will operate within the parameters and justice of Philippine law.
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