The Most Important Questions to Ask Before Taking on Debt

Taking on debt can be a major financial decision that impacts your long-term financial health. Whether you’re considering a mortgage, student loan, credit card, or personal loan, asking the right questions can help you make better informed decisions. Before signing on the dotted line, consider these crucial questions:

1. Why Do I Need This Debt?

Understanding the purpose of the loan is essential. Is the debt for an essential investment, such as a home or education, or is it for discretionary spending? One great rule to have for taking on debt is by borrowing for needs rather than wants. This can help ensure the debt serves a meaningful financial purpose.

Of course, vacationing and wants of that nature can still be meaningful as they can provide us with meaningful memories, but there are other ways to bring those dreams to life without taking on unnecessary debt. If you’re considering financing a vacation or larger expense, check out these savings strategies to avoid racking up the debt.

2. Can I Afford the Monthly Payments?

Before ever taking on debt, be sure to review your current income and expenses to determine whether you can comfortably afford the loan payments.

While your bank will review your financial situation before lending you money, performing your own budget assessment will help you consider other smaller expenses, ultimately helping to avoid taking on more debt than you can handle.

MISTAKES MANY YOUNG ADULTS MAKE THAT HURT THEIR SAVINGS

3. What Is the Interest Rate and APR?

The interest rate determines the cost of borrowing, while the annual percentage rate (APR) includes fees and other costs. Comparing APRs across different lenders can help you find the most cost-effective borrowing option.

4. What Are the Loan Terms?

Check the length of the loan, repayment schedule, and any penalties for early repayment. Longer loan terms may lower your monthly payments but increase the total cost of the loan over time.

5. What Are the Consequences of Missing a Payment?

Understand the penalties for late or missed payments, such as fees, increased interest rates, or damage to your credit score. Knowing the consequences can help you plan accordingly.

THE RISKS OF COSIGNING A LOAN: WHAT YOU NEED TO KNOW

6. Do I Have Other Financing Options?

Consider whether there are alternatives to borrowing, such as using savings, increasing income, or seeking lower-interest options. Avoiding debt altogether may be the best financial move in some cases.

7. How Will This Debt Impact My Credit Score?

Debt can affect your credit utilization, payment history, and overall credit score. A strong credit score can help you secure better financial opportunities in the future, so be mindful of how borrowing impacts your credit profile.

NEED TO BUILD YOUR CREDIT SCORE? CHECK OUT THESE TIPS

8. Is the Lender Reputable?

Research lenders, read reviews, and compare loan terms before committing. Scams and predatory lending practices can lead to financial hardship, so ensure you're working with a trustworthy financial institution.

9. What Happens If I Can’t Repay the Debt?

Consider the worst-case scenario and what options are available if you struggle to repay the loan. Some lenders offer deferment, refinancing, or hardship programs, while others may pursue aggressive collections.

STRATEGIES TO PAY OFF DEBT

Debt can be a useful financial tool when managed responsibly, but it’s crucial to ask the right questions before committing. By evaluating your financial situation, loan terms, and repayment ability, you can make a smarter borrowing decision that supports your long-term financial goals.

UNDERSTANDING MORTGAGE JARGON