Many of us have the desire to purchase an expensive item from time to time, for instance, buying a new bag or even a car.
But if you are buying a big-ticket item like a property or a car, not everyone can afford to pay such a hefty sum upfront in cash. Most of us will have to take out a loan.
However, you should only borrow what you need. Don’t get carried away and fall into the pitfall of over-borrowing, you can potentially cause your debt to accumulate if you can’t repay.
Take time to evaluate your options carefully. Do you know that if you are a socially and morally responsible borrower and build up good loan repayment habits, you can potentially increase your chances of getting your next loan at a lower interest rate?
But what do we mean by being a responsible borrower? Here are 6 tips on how you can be one while avoiding sinking into debt.
1. Consider carefully if you really need the loan
Yes, we mean it. Consider very carefully before taking out a loan. What are you taking out the loan for? Is it for a family member’s medical emergency? To pay off crucial home renovation expenses? Or simply to make a large luxurious purchase?
And most importantly, will you be able to repay the loan later on? Will the loan instalments be comfortable for you to juggle alongside your other expenses?
You have to ensure that you have exhausted all other viable options before considering getting a loan. For example, is it necessary to do your home renovation immediately or make the purchase now? Or could you wait until you have the cash flow to do so?
If you have carefully evaluated all options and getting a loan is the best option for you, the next step is to look for either a bank or a licensed money lender which provides competitive rates.
Some of you might even consider borrowing from friends or family members, but we highly recommend against that. Find out why taking out a loan from a loved one might not be a wise choice in the long run.
Also, here are some factors you need to consider if you are debating whether you should take out a personal loan from a bank or licensed money lender.
2. Review your financial status – can you afford to repay your loan?
Before applying for a loan, it’s crucial to review your financial position. Calculate your monthly expenses to get a good picture of where you stand. With your current income, can you afford to repay the loan? Or would you struggle to do so?
Look into your short and long-term capabilities. For example, if you are a salaried employee with a secure job, you might feel comfortable repaying a loan over a certain period as you have a fixed source of income.
But on the other hand, a self-employed person might not feel the same as there might be no steady source of income.
Do not enter into debt if you aren’t sure when and how you are going to get out.
3. Be aware if you might be over-borrowing
Many people are often not aware if they are borrowing more than what they need.
Avoid this pitfall simply by calculating the amount you really need. Don’t over-borrow as you will need to pay interest on every dollar you borrow.
For instance, if you are getting a loan to purchase a car, approach the car dealer for a detailed breakdown of the car purchase price. That way, you can easily calculate the loan amount you need.
And if you can afford to pay off a portion of the purchase without greatly affecting your cash flow, it is recommended to do so. You don’t need to borrow the maximum loan offered by your lender based on your eligibility.
4. Develop healthy financial habits
Even before you take a loan, it is important to build up healthy financial habits such as spending within your means, keeping track of your monthly expenses, and having enough savings for emergencies.
This will set you on the right track when you take a loan. Incorporate your loan instalment payments into your monthly expenses and make sure you repay your loan on time.
5. Have a backup plan in case you can’t repay your loans on time
Before you commit to a loan, read through the loan terms and conditions carefully to understand the implications if you default on your loan. Double-check with your lender if in doubt.
If you are late on your repayment, late interest and late payment fees will be imposed and this will affect your credibility as well.
For secured loans (loans taken against an asset) such as car loans or property loans, the lender has the right to seize the asset that has been used as collateral if you default on your payment.
That is why it is always good to have a backup plan just in case the worst happens and you cannot pay.
Can someone help you out financially temporarily? Or do you have any other assets that you can liquidate to pay off your loans as a last resort? These measures can be a real lifesaver if something unexpected happens. Though, ideally, you should have an emergency fund for such a situation.
Find out here if a secured or unsecured loan would be a fast and easy loan option for you.
6. Understand different loan options before committing to one
Read up on the different types of loans available and understand their loan terms, with both banks and licensed money lenders. It is important to understand the differences between taking a loan from a bank versus a licensed money lender.
If you do not qualify for a bank loan and need to take a personal loan with a licensed money lender, do compare different interest rates with different licensed money lenders before making an informed decision on which would be a suitable loan scheme for you, based on your financial and personal needs.
Borrow from the best licensed money lender in Chinatown
If you stay in or around Chinatown and are looking for a reliable and trustworthy licensed money lender, Soon Seng Credit is the top Chinatown licensed money lender with more than 2,000 5-star Google reviews.
We always seek to understand our customers’ requirements before recommending loan options that are suitable for them, while adjusting the repayment terms according to their needs.