Loans 101 ... Cynthia

What is a loan? Oxford dictionary defines it as “a thing that is borrowed, especially a sum of money that is expected to be paid back with interest”. There is a feeling you get when loan money gets in your hand or hits your account. It is euphoric. You feel like you won a jackpot and can buy anything you ever wanted; regardless of the amount. You spend the money in your head and the excitement remains at peak level until you have paid for and acquired whatever you decide to spend on. This is when reality checks in. It downs on you that you are in debt.

We learn about loans early in our lives. Most of us begin borrowing at a young age. Remember asking your brother, sister or friend for some money and promising to pay back? It could have been as little as twenty shillings, but the point was you had to pay it back.  Luckily, loans from our family members and friends do not usually come with an interest rate so we are spared the pain of having to pay a percentage more than what we borrowed.

As you get older and start making a life for yourself, chances are you will need loans to enable you achieve some of your goals. To start that business, buy that plot of land, build that house, buy that car and so on. This is where you need to get smart before you take out that loan.

Before taking a loan, make sure you have a solid plan on what you want to use the money on. Most financial advisors advise you take a loan only to use the money on something that will generate income hence pay for itself. A business or investment is highly recommended. The solid plan will reduce the chances of squandering the loan. There is nothing worse than repaying a loan; with interest; yet you can not put your hand on exactly where you spent it.

The key factors to consider when taking a loan are interest rate and the repayment plan. Interest so that you can know exactly how much more you are binding yourself to pay compared to what you are getting. There are periods when the interest rates are extremely high. These are also the times financial institutions are more that willing to give loans. They know exactly what they are getting out of it. It is wise to window shop and find out the interest rates offered by different lenders in the market. The differences can be quite substantial. 

The repayment plan is key to enable you plan your finances going forward. You need to know how much of your periodical income will go towards repaying your loan so that you can adjust accordingly. Reality of the cost of borrowing hits home during the repayment period. If you did not plan from the onset it will be a trying period. You will either struggle to make ends meet because of the payments or you will be unable to meet your obligations and this opens the door to a whole different angle of the relationship with your lender. A not so good angle.

Avoid loan sharks at all costs. Yes they do exist and yes they are exactly like is shown in mafia movies. Okay, they might not break your legs like in the movies but they will take you for everything you have got. They will give you a loan in the shortest time possible; I have been told in some instances you can have the cash in your hand within half an hour; but their interest rates are ridiculous. As the saying goes, when the deal is too sweet, think twice. Reputable financial institutions are much safer.

All in all, do not fear to borrow because more often than not, if you want to develop yourself, you will need to borrow at one time or another to get there. Just be smart about it.