Since banks and credit unions create loans every day, you may think getting a loan is no big deal. You may also argue that if it weren’t for banks most people wouldn’t be able to buy a house, get a car or complete a college degree. So, loans are available to make our life a bit easier, right?
It really depends on the situation.
Just because loans are available doesn’t mean everyone should run out and apply for money whenever the mood hits. A loan can put cash in your bank account or make it easier to buy things you can’t afford to purchase outright, but getting a loan isn’t a decision to take lightly. You’re creating new debt and it can take several years to pay it off. So, you need to be absolutely sure you’re not getting in over your head.
Your financial judgment might be a bit cloudy if you’re excited about a purchase. But rather than let emotions dictate your decision, consider seven times when you absolutely shouldn’t get a loan.
1. You’re Already Complaining About Money
If you’re already complaining about money or if you’re living paycheck to paycheck, getting a loan is one of the worst things you can do. It doesn’t matter if your heart says you’re ready for a new car, or if you think you need a specific electronic gadget to be happy, adding more monthly expenses when you’re just getting by isn’t going to end well. You’ll end up robbing Peter to pay Paul and you’ll create unnecessary financial stress for yourself. There’s nothing wrong with getting a loan, just make sure you can afford the monthly payments and you’re not digging a hole for yourself.
2. Your Bank Won’t Say ‘Yes’ Without a Cosigner
A loan officer may take one look at your application and decide you need a cosigner. You might think the setback is a quick fix and you’ll simply ask your parents. But the fact that you can’t get a loan on your own might be a sign that you shouldn’t get financing. There’s obviously something about your application that makes a loan officer nervous. Maybe you have a low credit score, or perhaps you don’t earn enough to qualify on your own. Whatever the reason, a cosigner isn’t the solution. Attack the issue at its root, improve your credit, save a bit more for a downpayment, and get a loan when you can qualify on your own. At least this way, you won’t jeopardize another person’s good credit score.
3. When You’re Asked to Be a Cosigner
Not only should you avoid asking others to cosign your loans, but you also shouldn’t cosign for someone else. The last thing you need is somebody jeopardizing your good credit score. As a cosigner, you’re just as responsible for this loan. You may not foresee ever making a single monthly payment, but if the primary account holder defaults, you’re basically agreeing to take over the payments. Signing your name as cosigner isn’t something you can take back after a few weeks or months. You’re a liable party for as long as the person has the loan.
4. It Doesn’t Feel Right
After applying for a loan, the lender may come back and say you’re pre-approved for more than the requested amount. And some loan officers may even pressure or encourage you to take a larger loan. As tempting as it might be, don’t fall for this. The loan officer isn’t responsible for the loan — you are. Besides, a trustworthy loan officer won’t pressure you to get a loan outside your comfort zone. If you’re applying for financing, don’t feel obligated to proceed if the situation doesn’t feel right. Follow your gut. You know your personal finances better than anyone else. And if you honestly feel that a loan is too much for your budget, walk away. At the end of the day, it’s your credit and financial health on the line.
5. You Don’t Like the Loan Terms
Money experts recommend getting at least two or three quotes before saying ‘yes’ to a loan. This applies whether you’re getting a car loan, a mortgage loan, a personal loan or a student loan. You can compare terms and rates and make sure you’re getting a good deal. If for some reason you’re not happy with the terms a lender quotes, you’re under no obligation to proceed. Loan rates vary by bank or credit union. So if one bank offers a rate you’re not happy with, you can apply elsewhere. It’s best to shop around and check your rates. Even Financial and Credible are two loan marketplaces where you can prequalify without impacting your credit score.
6. When You Have to Borrow from Friends
I don’t know about you, but personally, I feel it’s dangerous to mix friendship with money. It’s one thing to borrow or lend $5 or $10 for lunch, but when you start asking for larger amounts, such as help with your rent or car payment, problems can arise if you’re unable to repay the loan in a timely manner.
Each person has to decide for themselves whether they will borrow money from a friend or lend money to a friend. Just be aware that money can complicate a relationship. If you decide to go this route, make sure you have a written agreement that clearly states the terms of the loan. For example: How much are you lending or borrowing? When is repayment required or expected? Does the loan involve interest?
7. You’re Pledging Your Car
If you’re desperate for cash and running out of options, you might be tempted to get a car title loan. But these loans are extremely dangerous because they require a free and clear car title as collateral. The terms are flexible, and some title loan companies don’t require credit checks and offer competitive rates. Still, it’s a risky way to get financing. The loan company takes your car title and keeps it until you repay the loan. And if you can’t repay the loan, the company can repossess your car — leaving you without a set of wheels.
You might need a loan to buy a house, finance a car or go back to school. But just because a lender is willing to put cash in your hand doesn’t mean it’s the right choice for you. Weigh the pros and cons and then consider whether now’s the right time to apply for a loan.