If you have been considering taking out a bank loan for a holiday, to pay debt, to renovate your home or to pay for upcoming personal expenses, here are a few things to consider about the practicality of taking out a bank loan.
Debt consolidation — One of the main reasons financial consultants will recommend taking out a bank loan is if you want to consolidate debts.
Many people have personal debts of credit card balances, store credit balances and even balances on cards issued for the sole purpose of buying clothing, electronics and entertainment products online. Many of these cards come with interest rates of over 20 percent.
Take out a bank loan or credit, however, and consolidate all of these debts into one loan and one payment. As many loans will have an interest of well under 8 percent, you can cut a huge amount out of the money you would have to repay if you kept the original debts.
Your debt is not out of control — If all of your debts consolidated into one payment are still manageable, then financial consultants recommend taking out a bank loan.
If your debts are so enormous, however, that there is little likelihood of paying them off even with a bank loan, it is not recommended you take out a loan. Especially as, by doing so, you could just end up damaging your credit rating even more if you are not able to pay off the loan.
You have a solid plan enabling you to pay off the loan — Only ever take out a bank loan if you have a solid plan to pay it off.
This means the money you currently earn is more than sufficient to pay monthly loan payments. It also means you have extra money in reserves in case you have problems paying off the loan.
If you do not have a firm plan that will easily enable you to pay off a bank loan, avoid taking one out. In many cases, if you do, you will just find yourself in even more financial difficulties.
Can you get low interest rates? — In order to make taking out a bank loan worthwhile, you will have to have a high enough credit rating to be able to get low interest rates.
If you take out a bank loan and the interest rate is as high as credit cards you currently have, there is no point taking on additional debt. Especially as you will have to repay it at exorbitant interest rates.
Calculate how much you would have to pay each month with both the credit cards you currently have and a bank loan. Only apply for a bank loan if the repayment every month would be less.