Personal Loans

How to Avoid Regret After Taking Out a Loan

August 4, 2023

Taking a loan is a big final decision and one that you are likely to think about until you repay it. At some point, you might start second-guessing your decisions after borrowing and wonder if you made the right call. This is particularly true if you didn’t use the money in any way that improved your finances or the debt turned into a burden you can’t wait to get rid of.

Regret from borrowing money usually shows up as disappointment in your choice, experiencing guilt or remorse. These emotions can lead to extra stress and impact your current and future finances. For instance, if your regrets stem from over-borrowing, you might be forced to forego savings to repay your loans.

Regrets after borrowing typically happen when you don’t do your due diligence.

Luckily, you can avoid all those post-borrowing regrets by taking these six steps before signing your loan contract.

Know Your Borrowing Motivation

The biggest borrowing regret often arises when people waste the money they borrow. This means they borrowed without a clear purpose, spent the funds recklessly, and later regret their decisions.

To avoid this, it is crucial to ask yourself why you are borrowing and what the loan is for. Answering these two questions can save you from unnecessary borrowing as they help you understand your borrowing motivation.

If you borrow just because you qualify for a loan or convince yourself that you need the money, you may end up borrowing more than necessary or spending the money on unplanned things.

Instead, when you have practical reasons for borrowing that don’t involve funding your lifestyle, you can ensure that you choose the right type of loan. This way, you can avoid bad loans that do not contribute positively to your net worth and get the best out of your loans.

Borrow Only What You Can Afford

Yes, you can borrow money and qualify for the loan, but have you considered whether you can pay it off? And would you be able to do so comfortably, or would it put you under serious financial stress and strain?

Before you sign the papers and accept a loan, sit down and examine your finances by analyzing your budget. Factor in hypothetical repayments to see if they'll take up a large portion of your income.

A good benchmark is to consider your debt-to-income ratio; would the loan make you spend more than 35% of your income on repayments? If yes, can you comfortably survive with the remaining 65% without lowering your living standards and sacrificing your other financial goals? Borrow only what you can realistically repay within your budget. Overextending yourself can lead to financial stress and regret later on.

Next, you need to consider the total cost of the loan. What is the interest rate and other application fees? Understanding the total cost can help you avoid borrowing, as the higher the cost, the more you will need to repay. Additionally, you can assess if the expense you're financing is worth the total cost and if alternative ways exist to fund it.

Finally, consider additional costs that might be included in the loan agreement, such as late fees and pre-repayment penalties. Before you agree to the loan terms, it's crucial to be fully aware of what the lender charges, when they charge it, and how much it will cost you.

Shop Around and Compare Lenders

Shopping around and comparing lenders can help you make a well-informed and suitable borrowing choice.

The type of loan and lender you pick should meet your needs, and the loan should match your financial circumstances. If they don’t, you can develop potential regrets in the future when you realise you picked the wrong lender or type of loan.

For instance, choosing the wrong type of loan can become evident later when you struggle to repay, causing unnecessary stress and difficulties. Or discovering better alternatives after borrowing can cause dissatisfaction with your initial decision.

Here are some tips for shopping around for loans and comparing lenders:

Use a loan comparison website such as Money254 to compare interest rates, repayment terms, and loan amount limits from different lenders.
Read the fine print and the loan contract carefully before you sign anything to ensure you choose the lender with the most suitable terms.
Compare the different types of lenders available, such as banks, Saccos, and digital lenders.
Consider your needs and circumstances when choosing a lender and the type of loan.

Have a Solid Repayment Plan

Taking a loan comes with many risks that can manifest when you default, including court-ordered salary garnishment, loss of the collateral if you had put up any, and a negative impact on your credit ratings. All of this can affect your finances and future borrowing opportunities.

To prevent this from happening, you need to create a debt repayment plan before you borrow. It will outline the strategic approach you will take to repay the loan while maintaining control over your finances.

A debt repayment plan allows you to incorporate the payments into your budget, making your finances more manageable and giving you peace of mind. It also helps you monitor your repayment progress to ensure you don't miss payments or break any loan terms.

Importantly, it considers the future while dealing with the present. A solid repayment plan can help you prepare for unforeseen circumstances. For instance, it will ensure you have a strategy to meet your obligations if interest increases or you lose your job.

Don't Rush The Process

You should not commit to a loan until you are satisfied that you are making the right decision. If you are not taking an emergency loan, consider giving yourself some time – a few weeks to a few months – to think it over.

This "cooling-off" period allows you time to educate yourself, explore alternatives, and consider how the loan fits into your finances. These steps can prevent you from making hasty decisions you might regret later.

Next, consider getting a second opinion from an expert before committing. A knowledgeable financial advisor or loan officer can be your best friend on your borrowing journey, finding a loan and avoiding regret later.

If you are working with a financial advisor, ensure they are licensed experts who will put your needs first and help you find loans that meet your needs and budget, help you avoid predatory lenders, and alert you if you're about to make an impulsive or costly choice.

If you are working with a lender-assigned loan officer, remember that their loyalty is to the lender. Therefore, don't let them push you against your better instincts.

Be Cautious of Predatory Lenders

A predatory lender is a financial institution, individual, or organization that engages in lending practices that take advantage of borrowers through unfair, deceptive, or abusive tactics.

When borrowing, avoid lenders who make promises of quick approvals without conducting proper credit checks or who impose exorbitant interest rates and fees. Predatory lenders often apply unfair practices that can hinder your ability to repay debt and serve to benefit them. This can cause you a lot of stress and dissatisfaction after borrowing.

To ensure that you are dealing with a legitimate lender:

Verify the lender's registration status - Legitimate lenders must be registered with state agencies before providing loans. In Kenya, registered lenders, such as banks and digital lenders, are licensed by the CBK, while Sacco Societies Regulatory Authority regulates Saccos.
Review customer feedback - Online reviews can provide valuable insights into the experiences of other borrowers with a specific lender. Make sure to read both positive and negative reviews to gain a well-rounded perspective.
Watch out for high-pressure sales tactics - Legitimate lenders will not coerce you into taking out a loan. If a lender applies undue pressure, it indicates something is amiss or concealed.
Refrain from paying upfront fees - Authentic lenders do not demand upfront fees. If a lender requests an upfront payment, it is likely a sign of a scam.

WRAPPING UP

Before deciding to borrow, it's important to consider other options to help you avoid potential regrets. First, you might want to inquire about the possibility of a salary advance from your employer to avoid borrowing for emergencies. Another alternative is to ask family or friends for short-term loans. This can come with favorable terms and no interest. Additionally, you can tap into your emergency fund instead of taking short-term loans.

Finally, if you've already taken out a loan and regret your choice, the best course of action is to focus on repayment. Recognize and learn from the mistake and commit to avoid similar pitfalls in your future borrowing decisions.

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Farah Nurow is an experienced Content Writer who enjoys writing creative and educative articles meant to provoke readers' thoughts. He loves sunny weather and thick books. You can connect with him on LinkedIn.