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Things to consider before taking out a loan

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Well-known short-term lender Wonga SA encourages consumers to think carefully before taking out a loan. A loan is an important financial commitment, and rushing into a decision is not recommended.

Some of the things you need to think about include:

  • Are you borrowing for the right reasons? Many people take out a loan to fund the purchase of a home or car, or to pay for a university education. On occasions you may need to take out a short-term loan to cope with a domestic emergency. However, it is much less desirable to borrow to fund luxury purchases of items you don’t really need, such as holidays, clothes and expensive gadgets. Unless you can demonstrate that you are saving money by doing so, it is also not a good idea to borrow money to pay off other debts, as you will simply be exchanging one form of debt for another. Finally, it is not good news if you are borrowing to fund regular expenditure – if you can’t make ends meet this month, how will you be able to pay all your bills next month, whilst also making your debt repayments?
  • What is the best form of borrowing available? You may for example be able to borrow via a personal loan, a credit card or an overdraft
  • What are the costs of borrowing? What are the interest rates on these different borrowing options, and what fees will the lender charge? Have you shopped around to find the best rate? It is all too easy to be tempted by the first lender you approach, who may promise to be able to complete the loan application process quickly, but is there a more cost-effective option?
  • Can you afford the initial monthly repayments? As a general guide, some financial experts recommend that no more than 35% of your take home salary should be spent on loan repayments. However, people’s individual circumstances vary, and the cost of living can be much higher in different parts of the country than in others. The best course of action is to put together a budget, where you work out what you already spend on food, clothing, transport and other areas, and then work out how much you can realistically afford to pay in debt repayments
  • How long will you need to repay the debt for? Whilst you may be comfortable with the level of initial monthly repayments, will you be happy to repay this amount each month over the full term of the loan?
  • What is the total amount you will need to repay? This amount can be determined by multiplying the amount of each repayment by the number of payments that will be required. Are you comfortable with the idea of repaying this much? Many people are attracted by the idea of consolidating their debts, i.e. taking out one big loan and using the money to clear a number of smaller debts. However, while the initial monthly repayments are often lower, consolidating debt often means extending the term of the debt, and thereby increasing the total amount that needs to be repaid in the longer term

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