So you've got this amazing business idea and you've thought about it over and over again and you're very positive it would boom. But you just don't have enough capital, and you're considering taking a loan.
Or there's this house by the beach that has an awesome view. Your dream house; your wife and kids are so going to love it, but you can't afford it just yet.
The house agent says you'd never get it cheaper than this. "This is a lifetime opportunity" he chips in. So you're considering taking a loan. You have a steady job afterall and you can pay off the debt before the end of the year, but, what if you lose your job?
People take loans everyday for various reasons. Some people take loans to start a business, some to acquire a property, some for health reasons, some even take a loan to pay off interest on another loan!
But this comes along with its own burdens because sometimes even with the best plans and good intentions, things may not really work out fine.
This causes strain on good relationships, or a bad name for the borrower when he can't pay back and a multitude of worries and anxiety.
It is reasonable then to conclude that since taking loans causes friction, it should be viewed as a last resort and not an easy alternative to solving money problems.
For example, instead of borrowing a huge capital; how about, building your business from the scratch with the little capital you have and expanding it as time goes on?
Surely, that would be very fulfilling.
There is no fixed interest rate on loans. It is based on the agreement and terms between the debtor and the creditor. Though a 10% interest rate is more common, some people think of loan as just borrowing money when they do not have available capital. Some stake their assets as collateral without proper reasoning or analysis and this has led to a lot of courtroom settlements.
Loans should abide by some strict agreements between the parties involved. Although this strictness comes in different levels. For example, the strictness involved in a loan agreement of when one loans out a certain amount to his family member, will certain differ from one loaning out to a business fellow, or a firm loaning out to a different firm.
Some loans come as financial assistance and thus do not have any attached interest. Giving out loans with interest is legally supported and thus it is best to back the loan term agreements legally is best advised. That is, involving a legal third party (a lawyer) is advised regardless of the level of strictness of the loan agreements.
Some people tend to go by a religious third party instead and this has lead to complicated issues when the borrower does not pay back and then the lenders now seeks legal involvement.
Before taking a loan, you should have a planned out means to achieving a profitable end, that is, you should have made some profit from the loan after paying the loan and all agreed interest. Having a good business plan aids a lot in getting loans granted.
Some firms who grant loans tend to be more interested in your business plan than in your collateral. Even some government sponsored projects would seek just your business plan when you seek a loan.
Is Taking A Loan Financially Advisable?
- Be sure that you an easily make the payments. Do not be too hasty to sign on the dotted lines to loans with high interest rates which you cannot obviously afford.
Having a realistic payback budget keeps you on a safe side when requesting a loan instead of making yourself believe that you could maneuver in some way later in the future and pay back. - When you need an essential asset and you lack the funds to purchase it or maybe purchasing it would render you broke, it is better to take a loan and buy it where by you can pay installmentally with the attached interest. Be sure that the assest is essential, for example, if you have to drive to work everyday, you should have a functioning vehicle, taking a mortgage loan here is okay.
- When your investment returns are greater than your interest rate, taking a loan is best. Some people only think of reinvesting their profits, but expansion, especially when there is a good market demand of your services or goods is best achieved using a loan. Lets say your investment returns per month is 5% and your interest rate per month is 2%, while not take a loan and grab the 3% as extra profit.
- Taking a loan when you know that you can pay it off early is okay. For example you have an urgent purchase to make but do not have the money to do so at the moment, but you are certain to get the money to pack in due time, its okay to take a loan. This types of loan are usually short-term and are often taken by salary earners who are sure of a specific amount being credited into their accounts every month end.
- It is advisable to take a special loan when you have a well laid down business plan to assuring you of some investment returns. Special loans which are granted by many govt powered programs come with very little or no interest. It aim is mainly to increase the country's entrepreneurship level and reduce poverty ratios and not for profitable reasons, thus do not attach harsh interest rates.
Taking these kind of loans very much advisable, where by you save the supposed interest as more capital once the loan has been withdrawn.
Even though loans might be financially frowned at, some cases just require them to make a larger profit. It offers its own risk just as every other business does. Before thinking of taking a loan be certain of its necessity and its profitable returns.
The decision to take a loan should never be made hastily. Hence, after weighing the pro's and con's, getting a plan B for backup wouldn't be out of place.
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