12 Useful Questions About Debt You’ll Be Glad You Asked
Borrowing money can be tricky, so it makes sense that many people have questions about debt. On the one hand, having access to cash is crucial when you need a safety net during difficult times. Oftentimes, well-planned debt can help people purchase big-ticket items, such as a home or vehicle that will improve their quality of life and even their finances in the long run. On the other hand, too much or risky debt can be a significant barrier to financial stability.
It’s important to ask questions about debt before taking on any loans or making any purchases on credit. By asking the right questions, you can better understand what options are available.
Questions to Ask About Any Type of Debt
If you’re considering taking on debt or reviewing the loans you’ve already signed, asking yourself these questions can help you better handle your overall debt situation.
Why do you want to take on debt?
You might want to gain access to additional funds for several reasons. You might need money to pay for an emergency expense, like a car repair or medical bill. You might also use a loan to finance a major purchase, like a home or college education. And finally, you might want to consolidate debt from several different sources into one monthly payment.
Determining your financial needs, the loan length, how you will use the credit, and why you need it will put you on the right path to finding the loan that best fits your circumstances.
What kind of equity or collateral do you have available?
When you borrow money, the lender wants to be sure that they will get their money back plus interest. Most of the time, the debt is backed by collateral, an asset the borrower puts up as security. For example, when a homebuyer obtains a mortgage, the home serves as the collateral for the loan. For a car loan, the vehicle is the collateral.
If you don’t have 100% owned assets to offer as collateral, the lender may require you to take out a loan secured by your equity. Equity is what an asset is worth minus any outstanding payments. For example, equity is the difference between what your home is worth and how much you still owe on the mortgage.
Your debt may be considered unsecured if you don’t have any equity or collateral.
What kind of debt best meets your needs?
Not all debts are created equal. While debt comes in several forms, all personal debt can be categorized into a few main types:
- Revolving debt: The term “revolving debt” refers to a type of consumer credit where the borrower and lender have worked out an arrangement where the borrower can borrow money repeatedly up to a certain cap. Revolving debt can come from sources like a credit card or a line of credit. Revolving debt payments are calculated differently each time you borrow money.
- Secured debt: A secured debt has collateral to guarantee payment in the event of default. If the debtor cannot repay the loan, the lender can take possession of the collateral. A car loan is a type of secured debt.
- Unsecured debt: When a lender extends credit without requiring collateral, it trusts the borrower’s character and ability to repay the debt. Certain credit card balances, signature loans, gym membership contracts, and medical bills fall under the category of unsecured debt.
Most financial institutions offer a variety of products that provide secured, unsecured, or revolving debt. Some examples include auto loans, consumer credit cards, deposit-secured loans, home equity lines of credit (also called a HELOC), land loans, personal lines of credit (different than a personal loan), and recreational vehicle loans.
What is the total cost of the loan, including interest?
When you borrow money, the total cost of the loan includes more than just the principal amount. You also must pay interest, a percentage of the loan amount charged for borrowing money. The interest rate varies depending on the type of loan and the lender, but it is always expressed as an annual percentage rate (APR).
The APR considers the interest rate and any fees associated with the loan, including origination fees, closing costs, or prepayment penalties. It is essential to be aware of all these costs before you take out a loan to accurately calculate how much you will need to repay each month.
How much will the interest be, and will it stay the same or change?
Fixed and variable interest rates are crucial in determining loan type and lender. As the name says, fixed rates loans have a set interest rate, meaning the interest will remain the same from the initial repayments to the end. If you prefer predictable payments, fixed interest rates may be your best option.
On the other hand, variable interest rates, also known as floating interest rates, depend on changing market dynamics. Fixed-rate loans like student, personal, and mortgage loans are also offered at variable interest rates. One main benefit of the variable loan is that the interest rates can decline because of various economic factors.
Before selecting a debt option based on its interest rate, we recommend you analyze your credit score and financial situation first. Ask your local credit union about the best options for you.
Can you afford the monthly payments?
When considering taking out a loan, the most critical question is whether you can afford the monthly payments.
There are a few ways to determine this. The first is to add up all your monthly expenses and see how much money you have left each month after paying bills and other obligations. If not enough money is left over each month, you cannot afford the loan payments.
Another way to determine if you can afford the loan payments is to calculate how much your total debt would be after adding in the new loan. You cannot afford the loan payments if your total debt exceeds 50% of your annual income.
Finally, it is always best to speak with a financial advisor if you have concerns about whether you can afford the payments. They will be able to help you figure out what your options are and which one would be best for you.
How long will it take you to pay off the loan?
When considering taking out a loan, it’s essential to consider how long it will take you to pay it off. The longer the loan term, the more interest you’ll pay in the long run. But if you need the money for a longer period, extending the loan term and saving on interest might be worth it.
Use an online calculator or spreadsheet to figure out how long it will take you to pay off your loan, your monthly payments and how much interest you will end up paying. You can also use this information to compare different loans and find the best one for your needs.
Are there any penalties for early repayment?
Loans come with specified terms, which include loan terms, interest rates, and payback time. Sometimes, you may be charged a fee if you decide to pay off your loan before the agreed-upon date. It’s important to talk to your lender about the details of your loan so you can decide what’s best for your finances.
What are the tax implications of borrowing money?
Loans are not part of your income and are not considered taxable. However, if you don’t repay the loan as agreed, the lender may be able to sue you for the money you owe. In addition, the Internal Revenue Service (IRS) may treat unpaid debt as taxable income. For example, suppose you acquire a loan of $150,000 and pay $100,000. However, you had financial problems and could not afford the remaining $50,000, so you filed for bankruptcy. Unfortunately, you now must show the remaining $50,000 as your income, which will be taxable.
Where will you borrow money?
You’ll find many options when searching for lenders. Online lenders, banks, and credit unions are typical loan lenders—but forgive us if we’re more inclined to suggest a credit union.
Credit unions, member-owned, cooperative, and not-for-profit financial institutions, offer various financial services, including safe places to borrow money at reasonable rates. In the long run, you can often save money by working with them because of their personalized service, adaptability, and attractive interest rates and fees.
How reputable is the lender?
Small-dollar loans with exorbitant interest rates and fees (think triple-digit percentages) are a classic example of predatory lending practices that you should avoid at all costs. Some lenders’ unfair, deceptive, or fraudulent practices during the loan application process can trap borrowers in an endless cycle of debt. Predatory lending typically involves luring borrowers into taking on more debt than they can afford and charging them exorbitant interest rates or fees they weren’t expecting.
Often, people turn to these types of loans and lenders when they have an emergency and feel backed into a corner—which can make the resulting long-term debt even worse. If you need to cover an urgent, unexpected expense quickly, consider Greater Nevada’s Right Now Loans™. These loans are intended for short-term borrowing needs and do not require a credit check, with your income as the primary qualification.
What kind of benefits does the lender offer to its borrowers?
As a borrower, you may feel vulnerable, but you have more clout than you realize. Borrowing and lending money is a two-way street, and lenders need people who are willing and able to borrow money to be able to continue lending money. That’s why many lenders offer several different benefits to entice people.
Look for financial institutions that provide benefits such as digital tools, financial assistance, and ways to defer a payment if times are challenging. If a bank or credit union also offers robust financial education resources and personalized customer service, you know you’re working with an organization that will value you.
Why It’s Important to Ask the Right Questions About Debt
When it comes to your finances, it’s crucial to ask the right questions about debt. By taking a closer look, you can make more informed decisions about your money and better position yourself for a brighter future.
Looking for a lender to be your partner and answer all your questions about debt? At Greater Nevada Credit Union, we’re committed to helping our members understand their finances and make the decisions that benefit them the most. To learn more about becoming a member, click here.