It’s common for people to apply for a loan. In fact, we are so used to living on credit, we can’t think of any other option when we need money.

Personal debt in Australia is very high with average household owning about $250,000 in personal debt. It’s important that you think before you apply for a loan.

Bill Baker from Lend Capital say’s “taking out a loan is a big step in anyone’s life. You must show commitment,  long-term financial accountability is required. Taking out a loan can also be a positive growth towards achieving success and ultimately your goals in life. It is a real”.

Here are five questions to ask yourself before you take out a loan:

#1 Do You Have no Other Source?

If you need money, the first option should be your own savings. Don’t use your emergency fund unless it’s an emergency, such as a medical situation.

Dave Ramsey once said “Keep in mind that you have permission to use your emergency fund if you have an unexpected, immediate expense. Just remember to replenish your savings as soon as you get back on your feet. You never know when you’ll need it next.”

Next, consider turning to your friends and family members and ask for help. They may be willing to provide you with a loan at less stringent terms than banks and at lower interest rates.

However, if you have no other option, then opt for a lending organization. But, choose one with care. You can use the internet to compare different loans and pick one that suits your needs the best.

#2 Do You Really Need to Make this Purchase?

Only spend money on what you really need. A lot of us buy things that we don’t truly need. For example, if your machine has malfunctioned, consider replacing parts or consulting a repair company before you opt to purchase a new machine.

Of course, at times, purchasing a new unit might be more profitable in the long-run. It all depends on what kind of condition the machine is in. But, again, if you have to apply for a loan in order to fund the new purchase then add it to the cost as well.

Consider postponing the purchase until you can afford it without needing loan money. However, if it’s extremely necessary, then pick a loan that’s most affordable for you.

#3 Can I Find More Affordable Options?

Save money wherever you can. For example, if you need to buy a car then consider getting a used one. Cars are quite durable and used vehicles can work for years without causing any trouble.

Some other machines may also be bought used. Just make sure to buy from a reliable source and check if you can get a warranty. However, don’t invest in a machine that you’re not sure about.

In such a case, applying for a loan may be the only option. But, again, consider the right option. For example, if you need machinery then consider equipment financing.

#4 Will I Be Able to Make the Payments?

This is the most important thing to be clear about. Be honest about your financial situation and consider how this purchase may impact your credit score and the ability to apply for loans in the future.

There’s always the opportunity cost. When you take a loan, you will have to make monthly payments that may prevent you from spending money on other activities, such as night outs and vacations.

Also, pay attention to your debt-to-income ratio. The ratio should be under 25%, including your mortgage. The lower the number, the better it is for you.

#5 What if I Am Unable to Make Payments?

You may get into trouble if you fail to make timely payments. This, however, depends on what kind of loan you have taken. It may cause you to lose your collateral. Plus, it may also have a very negative impact on your credit score.

There are unsecured loans as well. They require no collateral and hence are safer than secured loans. Consider such loans to safeguard yourself.

Look at all these factors when applying for a loan. The key lies in taking a loan only when you really need it and you’re sure of being able to pay it back on time.