The demand for money and its supply can never be the same. This means that one will never have as much as they want to spend. The desire to achieve more and more is limited by the availability of money. The bridge between the shortage in the demand and supply of money is the availability financing by debts. Many people have succeeded in life through taking loans to finance projects and latter using the revenue in repaying the debts. The success of a person in repaying the loan will be determined by the how well he was able to analyze the possibilities of success and failure in the endeavor. What are the factors to consider when taking a loan?
Source of the Loan
The first factor to consider is the source of the debt capital. There are some possible sources of loans. The most common source of loan is the banks. Commercial banks engage in the business of giving potential customers loans. The loan is paid after an agreed time. The banks are known to give the very cheap loan to customers. The second source of loan is the corporative organization. This is institutions where members are allowed to save for some months and then given a loan depending on the amount of saving. For one to get a loan from such an organization, one has to be a member. Online platforms are also possible sources of loans. Some banks give out loans through an online portal. This has been a common trend in the banking industry. Apart from banks, some companies solely deals with the provision of online debts to the customer. They operate in websites and applications.
The Cost of Borrowing
The cost of borrowing the money more than the principle that one is required to repay upon taking a loan. The cost of borrowing is determined by the source of the loan as well as the amount of the loan. Loans that are payable within a long period are generally cheaper than those payable within a short period. Loans from saving cooperatives are the cheapest to take. This is because these institutions are exempted from paying any tax from the interest payable from loans. The cost of borrowing should be the main factor to consider when taking a loan. Don’t take a loan that attracts a large interest. It is economically advisable to take up a loan whose cost is above 25% per annum.
The Purpose of Taking the Loan
What is the main reason for taking the loan? Any loan should be used to finance an income generating investment. A loan should never be used to pay other obligations. Using a loan to pay other obligations adds the cost of borrowing. Always ascertain the economic viability of a project before you decide to take a loan to finance it. Consider the possible alternative financing options and calculate the addition or reduction in the cost of financing.