As the economy recovers from harm caused by the pandemic, you may be thinking about taking on debt to help with your own financial rescue plan. However, borrowing money brings its own set of challenges and risks you need to consider before diving into the debt pool. Here are three top questions to ask yourself before taking on debt.
1. How Much Debt Can I Afford?
Before taking on debt, it’s important to keep your financial “big picture” in mind. If you’re thinking about buying a new car, taking out a personal loan, or getting a credit card, can you afford to make payments every month? If not, you could do serious damage to your credit and your finances overall. Even missing one debt payment by 30 days or more can hurt your credit score, which could make it more difficult for you to get a loan or insurance, or even rent an apartment, in the future. So be sure your budget has room for an additional monthly payment before adding another debt account into the mix.
Also, consider the cost of borrowing money. If your credit score could use some work, you may not be able to get the interest rate and terms you need for a new loan or credit card to make sense financially. Taking time to improve your credit score can help bring down the costs of borrowing.
2. Will Taking On Debt Help With My Financial and Life Goals?
Borrowers usually take on debt to achieve some short-or-long-term financial goal (or both). In the short-term, a bathroom remodel, for example, improves the comfort of your home. In the long-term, it can raise your house’s value and, therefore, the selling price. Other types of debt, sometimes considered “good debt,” such as taking out a loan to pay for your education, buy a home or make a business investment, may be necessary to reach your future goals. But if you’re considering new debt to, say, pay for a vacation, think hard about whether it might be better to save money every month and take your trip a little further down the road. Saving up in advance will mean you won’t have to face a big bill (with interest) when you return.
3. Is Now the Best Time to Add to My Debt?
Sometimes taking on debt is a question of timing. Ask yourself: Do I need to borrow now, or is there a better way to pay for what I need? One common decision is whether to repair the car you already have or to take on debt to buy a new car. That decision usually comes down to how much the repair will cost and how long it will extend the car’s life. However, timing is also a key factor. Could there be changes to your income in the near future? Is anyone in your household at risk for getting laid off or taking a leave for sickness or pregnancy? In an uncertain time, taking on additional debt could put your finances at risk.
Eyes on the Future
If the past year has taught us anything, it’s to expect the unexpected. So, if you’re undecided about taking on new debt at the moment, answer the questions above when deciding whether the time is right. If you have doubts, it may be better to work on improving your credit score, keep an eye on interest rates, and determine if you can afford new debt before taking the plunge.