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Is It Time To Take A Loan?
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Often, a loan can fix big short term problems and cause small long term problems that might bother your for a lengthier period, but being able to prepare for it has an advantage. The recent turbulence the world has seen caused a lot of surprises for people. The restaurant industry was projected at sales of $899 Billion for 2020, but that probably won’t happen due to 2020 being so strange. Think of nearly the 15 million people working in that industry. They couldn’t plan for this dark period, but found themselves deep in it. Therefore, we want to discuss which loans suit the current situation.
Often, a loan can fix big short term problems and cause small long term problems that might bother your for a lengthier period, but being able to prepare for it has an advantage. The recent turbulence the world has seen caused a lot of surprises for people. The restaurant industry was projected at sales of $899 Billion for 2020, but that probably won’t happen due to 2020 being so strange. Think of nearly the 15 million people working in that industry. They couldn’t plan for this dark period, but found themselves deep in it. Therefore, we want to discuss which loans suit the current situation.
Savings VS Loans
Interest rates tend to be much higher than the return on investment (ROI) of our savings. Therefore, if someone has money in his savings account and is thinking about taking a loan in order to pay off debt, he could find himself paying much more interest on the loan than he would achieve through his saving account. The bank is always advising us to take loans, even if it knows our financial situation and that we have money saved up. Sometimes, they sound very convincing. But, the general rule of thumb is to don’t take a loan if you have savings. Unless, you are a fantastic investor and can reach incredible ROI’s.
Long Term VS Short Term
Lets assume a person needs a loan of $10,000 with an interest rate of 5% per year. If he’ll pay it in 5 years he will only pay a total interest of $2700 on his loan. If he’ll spread that loan for 10 years, he will pay $6200 interest on it. Therefore, people should aspire to take loans for the shortest period possible. Often, the bank won’t allow you to take loans that are too short, but the price you’ll pay for extending your loan could cause you a lot of problems.
Principal VS Interest
When taking a loan, you will know the amount of money that has to be paid back to the loan provider each month. However, that amount is consisted by two factors, principal and interest. The principal stands for the amount of money you are paying off on your loan, the interest stands for the fee that the loan provider is receiving from you for giving you the loan. Why is it important? because you must understand how your loan is structured. When the monthly payment is the same throughout your loan, it doesn’t mean that you are paying the same principle and interest portions each month.
For instance, a person is taking a loan with 5% interest, with a monthly payment of $500. At the beginning of his loan, he might pay $250 on the principal and $250 on the interest (5%0 interest), by the end of the loan it will lean more towards 497$ on principle and 3$ (0.6%) on interest. For the entire length of the loan, he will pay 5% yearly interest. However, the load of the interest will be much heavier at the beginning of the loan than at the end of the loan. Therefore, if in the future you will be looking to refinance or pay off your loan, you might find out that you have been paying 25%-30% interest on your payments. Therefore, take a really close look at what your loan is consisted of. Therefore, try to take a loan that will be consisted of the same interest and principal portions, even if it means that you will be paying higher interest rates (depends on when you plan to return the loan).
When is the time to take a loan?
This is simple, if it’s a personal loan, take it only when your’e out of savings and when you can’t longer decrease your spending. There are many ads for taking a loan to buy a car or to go for a vacation. However, you should resist temptations in these strange times. Of course, there are certain exceptions, but as a general rule of thumb, keep your spending to the minimum if your source of income is in jeopardy. If you are following this rule and still need a loan then take it.
For business owners, the question is more complicated. For most businesses, if their ROI is good, they should take loans to increase their spending and maintaining growth because the interest they are paying on their loan is lower than the profits they are making on that money. However, it’s hard to project yearly ROIs and to understand what the future holds in times of uncertainty. Therefore, i’ll be more specific. For new business owners – perhaps this isn’t the right time to take a loan to pursue your dream business – interests rates are higher than usual and the economy still faces high unemployment rates. However, if your business was profitable before the mess and you suspect it will be profitable after the mess than taking a loan to stay afloat seems like a reasonable idea.
