Personally, I’ve never liked the idea of taking loans not because I think it’s a bad idea, but because I don’t like the feeling of having anything hanging over my head. Bad loans have kept many people perpetually in debt and are also the reason why a lot of friendships and relationships have gone sour. Debt is also the reason why many people are unable to achieve financial freedom.
Be that as it may, there are legitimate reasons to take loans and we will be talking about a few of them. Whatever your reason may be, you need to ask yourself the following important questions before you take that loan.
- Do I need it? In a previous post, we have classified wants and needs. If you’re taking that loan for a “want” instead of a “need”, then you might have to consider saving for it instead.
- Can I afford it? Taking the loan is easy, the hard part is paying it back. You need to consider the interest rate and your source of income to determine if you would be able to comfortably pay back that loan before you take it.
- Are there better options available? There are different types of credit facilities, you need to thoroughly consider all your options before you make a decision.
We have outlined some of the common reasons why people take loans and we will be discussing if they are good or bad ideas.
- To Buy a Car: Now this has a caveat, You need to ask yourself certain questions before you can justify taking a loan to buy a car. Are you buying the car for luxury or as a necessity? Is owning a car going to save you money in the long run? I suggest you calculate how much you spend on transportation and how much you would save if you had a car instead. The amount of money you save should be able to service the loan without disrupting your finances.
- To Start a Business: This is one of the best reasons to take a loan; however, you need to do a proper feasibility study and understand the market you’re going into. Unfortunately, many businesses have failed and put the owners in huge debt. The best recommendation is to save up and start your business on a small scale, if the business is successful, only then should you take a loan to scale up.
- To Fund An Investment: This is another great reason to take a loan especially when the returns on the investment are higher than the interest rate on the loan. However, it would be wise to avoid high-risk investments like stocks. It’s one thing to lose your own money but you can’t afford to lose borrowed money.
- To Buy A House: Buying a house is one of the best types of investment and so it is a great reason to take a loan. If you buy a great property, the rental income can be used to service the loan.
- To Further Your Education: Taking a loan to further your education is a great idea, however, you need to be very strategic about picking your course of study. Find out about your chances of getting a well-paying job and how long it would take to pay off the loan.
- To Fund A Wedding: As silly as it seems, many people take loans to fund their weddings. The worst thing you can do to yourself is to start a marriage in debt. Don’t let the need to impress people cause strife in your marriage. If you must have a big wedding, wait until you have saved enough, otherwise, cut your coat according to your cloth.
- To Live a Luxury Lifestyle: It is always a bad idea to take loans for the purpose of traveling the world or buying expensive things. We all want to enjoy the good things of life but you don’t want to mount a huge debt to achieve that. With proper planning, patience, and discipline, you can achieve all your goals by saving and investing.
- To pay for Plastic Surgery: This is by far the most bizarre reason why some people take loans. Although it is quite common in the western world, plastic surgery is gaining more popularity in Nigeria. Taking a loan for plastic surgery is not a good idea because many times, you’ll end up going back for more alterations. Many people, especially in the western world, have spent thousands of dollars on plastic surgery.