How to Take a Loan Correctly

A loan is a financial tool that allows you to achieve your desired goal. But to use it effectively, it’s important to understand all the details and assess the risks.

Here, we’ll explain the different types of loans, how to choose the right one, and situations when it’s better not to borrow from a bank.

Should You Take a Loan?

Taking a loan can be the right choice in these situations:

• Immediate important payment: You need to pay for an essential purchase or service now, but you don’t have the full amount. For example, paying university tuition.

• Rapidly rising prices: The item or service you want is increasing in price quickly. For instance, with a mortgage, housing prices often rise, so taking a loan sooner can be more advantageous.

• Opportunity to save money: For example, a store offers a significant discount on a product you need, but the promotion is limited in time.

However, sometimes it’s better to avoid loans:

• Non-essential expensive items: For example, a new smartphone that will take a long time to repay.

• Risk of not repaying: If monthly payments are too high, your income is unstable, or you already have outstanding debts, it’s safer not to take on new financial obligations.

Types of Loans

Loans are generally divided into targeted and non-targeted:

• Targeted loans are issued for a specific purpose, such as buying a car, home, or household appliance. Often, the money is sent directly to the seller.

• Non-targeted loans can be used for anything — vacations, repairs, or medical expenses. Interest rates are usually higher than targeted loans.

Special types of targeted loans exist for major purchases: mortgages and car loans. These involve larger amounts, longer terms, and usually lower interest rates than consumer loans. However, they come with stricter requirements: proof of income, employment verification, and additional guarantees (collateral) that the debt will be repaid.

What Collateral Might Be Required?

Banks and microfinance organizations may request:

• Collateral: Your property, which the bank can claim if you fail to repay. For example, mortgaged property must be insured and pledged.

• Guarantor: Someone who agrees to repay the loan on your behalf if you cannot, and may later require reimbursement from you.

• Co-borrower: A person who shares full responsibility for repayment. Co-borrowers are often needed for large loans when a single income isn’t sufficient.

Loans with collateral, guarantors, or co-borrowers are called secured loans, and they typically have lower interest rates than unsecured loans.

How Will the Loan Be Repaid?

Short-term loans (a few weeks or months) are usually repaid in one lump sum at the end of the term. Longer loans generally involve monthly payments:

• Differentiated payments: The principal is divided into equal portions, and interest is charged on the remaining balance. Early payments are larger; later payments decrease.

• Annuity payments: The monthly payment remains the same. Initially, most of it covers interest, but over time more goes toward the principal. Convenient for budgeting, though total interest paid may be higher than with differentiated payments.

Credit cards have a special repayment structure: a 2–3 month grace period may apply, with no interest if repaid within that time. If not, minimum monthly payments are required, typically a percentage of the remaining debt plus accrued interest.

Choosing the Right Loan

1. Define the purpose, amount, and term of the loan. Consider whether you can provide proof of income, offer collateral, or involve a guarantor/co-borrower.

2. Compare different options and choose the one that fits best.

3. Understand the total cost, including interest and additional fees.

4. Keep loan payments under 30% of your monthly income to avoid financial stress.

5. Read all documents carefully before signing.

6. Verify the legality of the financial institution before applying.