What to Consider Before You Get a Loan
Cost isn't the only issue when it comes to taking on debt. You must pay attention to these three equally important factors.

My friend Sammy recently bragged to me about the luxury car he bought using borrowed funds. He proudly said his loan terms were 0% for 60 months, and his monthly payment of $995 is all principal, no interest!
Sound familiar?
Interest rates are low, and if you have a great credit score, many lenders are eager to offer you very attractive terms to borrow. Should you jump in and acquire the debt? Even after you've analyzed the costs from various sources and decided on the best offering, taking on a loan may not be a good move—at least, not without asking yourself these three questions.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Why am I borrowing?
Dig deep and ask yourself the question: What are your real reasons for borrowing? Is it to get something you absolutely need, or are you borrowing to get something you may want?
Let us drill down to clarify what are needs versus wants. Are you looking to borrow to cover the expenses for a medical emergency? Is it to buy a car so you can commute to work? Is it to purchase your first home? These might all qualify as needs that would be well worth the debt.
Or are you borrowing to get a $995 a month luxury car? A vacation home on the beach? That expensive, state of the art, high-tech gadget that you hardly use? Those all sound more like wants that you should save up to purchase rather than borrow to get.
Financial Savviness 101: Don't borrow what you do not need!
2. Do I have enough cash flow to sustain the payments?
It is true that your lender has approved the loan after reviewing your current cash flow status. Does this really mean you can sustain the additional cash flow for the duration of the loan?
For example, consider Sammy's case above: He is required to cough up a payment of $995, not just this month, but for the next 60 months. That will have huge cash flow impact on him for the next five years! Let us see if he is prepared.
- What if he or his spouse lose jobs during this period? Will he still be able to cover the payment?
- What if his children are college bound in a couple of years? Will this payment disrupt his goal to fund his kids' education expenses?
- What if he or his spouse has a medical emergency during this period?
These questions are best answered by developing a budget, and then seeing how the loan payment could impact the budget. Kiplinger's Household Budget Worksheet is a great place to start.
3. What are the consequences if I fail to repay?
Borrowing comes with an obligation to repay according to the terms you agreed upon when you got into the debt. So, it is important to understand what could happen if some unforeseen circumstances force you to default on the loan.
Here are few consequences to consider:
- Your lender may report your late payments or defaults to credit bureaus impacting your credit score significantly. This could make it harder for you to obtain loans in future. Are you comfortable with this?
- As part of the debt agreement, your lender may have secured the loan with collateral. In other words, you risk losing the collateral if you default on the loan. Are you prepared for that?
- Your lender may hire a third-party agency to collect missed payments. Collection agencies use aggressive approaches to collect payments from you. This may impact your day-to-day well-being. Can you handle this?
- Your lender may sue you, and if you lose, the court may force you to sell your other properties or force you to pay back the loan from your employment wages. Have you thought about this?
So, what do you think? Do you know why you are borrowing? Do you know if you could sustain the payments? Finally, do you know the consequences if you default? It is not my goal to discourage you from considering a loan, but I hope to prepare you with these non-cost considerations of acquiring debt. Good luck!
Vid Ponnapalli is the founder and president of Unique Financial Advisors. He provides customized financial planning and investment management solutions for young families with children and for professionals who are approaching retirement. He is a Certified Financial Planner™ with an M.S. in Personal Financial Planning.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
No Passport? No Problem. Seven US Getaways That Feel Like an International Vacation
From Puerto Rico’s Caribbean flair to Santa Fe’s old world charm, these American destinations deliver a global travel experience — without the hassle of customs or currency exchange.
-
I have to take a $22,000 RMD by the end of the year and I don't need the money. What should I do with it?
We ask financial experts for advice.
-
Budget Hacks Won't Cut It: These Five Strategies From a Financial Planner Can Help Build Significant Wealth
Cutting out your daily latte might make you feel virtuous, but tracking pennies won't pay off. Here are some strategies that can actually build wealth.
-
To Unwrap a Budget-Friendly Holiday, Consider These Smart Moves From a Financial Professional
You can avoid a 'holiday hangover' of debt by setting a realistic budget, making a detailed list, considering alternative gifts, starting to save now and more.
-
Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track Record
Homeowners who are considering using home equity in their retirement plan can analyze it like they do their other investments. Here's how.
-
Why Does It Take Insurers So Darn Long to Pay Claims? An Insurance Expert Explains
The process of verification, investigation and cost assessment after a loss is complex and goes beyond simply cutting a check.
-
Two Reasons to Consider Deferred Compensation in the Wake of the OBBB, From a Financial Planner
Deferred compensation plans let you potentially lower your current taxes and help to keep you out of a higher tax bracket. It's important to consider the risks.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)
Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
The End of 2%? An Investment Adviser's Case for Why the Fed Should Raise Its Inflation Target
Yes, inflation can be tough on those living on fixed incomes, but protecting us from it too strictly could do our overall economy more harm than good.
-
How the One Big Beautiful Bill Will Change Charitable Giving
Taxpayers who don't itemize will be able to take a bigger deduction for donations, which could boost giving. However, high-income donors could see their tax benefits reduced.