WHEN SHOULD I TAKE A LOAN?

Hello,

In Economics, we learn about the sources of finance. Loans are one of the sources of financing. We also hear that debt is good for business but many of us wonder is debt really good?

After taking some things into consideration I find that except I am taking a loan for the purpose of doubling the money, in current day Nigeria, I should run away from loans.

When should I take loan?

WHEN:

• You need to expand a venture/ Business doing very well already.

• You can pay off the loan without breaking into a sweat. For instance if your source of income went bust, you would be able to pay the loan still.

• You are aware of the interest component and have a proper understanding of the loan document.

• You have done the maths involved and would earn more from the venture requiring more than the interest to be paid back.

• The systems and structure of the venture requiring loan for is not inefficient.

• You have exploited the free and near free sources of financing (such as family and friends) but you still need more.

When shouldn’t I take loan?

WHEN:

• Your financial needs are not for investment purposes. Investment does not include marrying a wife, maintaining or improving your standard of living.

• You hope to find the money to pay off the loan as time goes on.

• You need to start a business. In the news a few weeks ago was the story about a woman who took a loan to enable her join a product distribution scheme that promised wealth to investors as they climbed higher on the distribution ladder, she went missing and as soon as the search for her started, a note she wrote about inability to pay off her loan was found. While I hope for a happy ending to the story, many and more ladies are borrowing money to start their businesses. Even borrowing from a contributory scheme to start off a business is not advisable.

• You think a loan will be the answer to a financial problem.

• You have not read and understood the contents of the loan document. If possible get legal interpretation of the contents before signing any loan document.

• You have not done any calculations concerning the actual cost implications of taking the loan.

What to consider before taking a loan?

Loans are thought to be an answer to financial constraints, it sooner than later places one in the position of indebtedness. Loans are actually a financial burden which should be taken on only after careful, calculated planning.

Loan financing can be compared to paying a penalty for receiving some of your future income now, it effectively implies you are sharing future income with the fellow or institution who has helped you spend your future income now. You should be interested to know if at all you should put yourself in a position to need to pay a penalty or spend your future income, how much penalty you are willing to pay/ how much of your future income you are willing to share and how to get a replacement for the already spent future income.

Are loans meant for everyone? NO.

Please leave me your comments belows.

PEARL