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Loans are often necessary to help make the next move for your practice and can be beneficial to your personal life. But before you take one out, make sure youâ€™re asking yourself the right questions.
Taking out a loan can be a blessing and a curse, if you aren't making sure you know what you're getting into.
Making the right investments in your practice is key to continued success, but it always requires money, and will often require more than you can feasible pay out of your own pocket. If you can’t afford a new renovation or piece of equipment right away, there are no shortage of loans available to help you close the gap.
Of course, every loan is different. On top of that, your needs are unique, meaning you’ll have to tailor the loan to fit your circumstances. In order to find the loan that best fits your needs, ask yourself these essential questions.
Why do I need a loan?
Before you take out a loan, take a good hard look in the mirror. What’s your motivation? Taking out a loan can mark the start of long-term financial success or the end of financial wellbeing as you know it. Any loan you take on should return enough value to your practice that it warrants the interest you’ll accrue as a result.
Consider whether the loan is for a one-time purchase or a big-ticket item that will stick with you for months or even years. In the case of a one-time purchase, a term loan could make the most sense, but you may also want to consider reworking your budget so you can make the purchase without taking out a loan.
How much money do I need?
One of the first things a lender will do is try to feel out your potential price range. Before that happens, ensure that you’ve established a hard-stop price range that you’re comfortable with and stick to it — it’ll save you from the pressures of the loan sales process (and from taking on more debt than you can afford). Look at your goals and how the loan will help you achieve them.
Is it a new house, new equipment, some new office space, a car to get to meetings? Find the realistic range you will need a loan to cover, and how much you can pay up front. Having wiggle room in your loan amount is something lenders will most likely look on positively but figuring out your price range and sticking to it is paramount.
How much does the loan cost?
When looking at your loan options, look at the interest rates of your potential loan, as this will determine the overall cost of the loan. Furthermore, ask the lender for the loan’s annual percentage rate, or APR. According to Wallethub, a financial website with trusted personal finance studies, loan APRs allow for simplified loan offer comparison by combining fees and interest rates to create a percentage that encompasses all possible payments for the life of the loan.
For example, if the APR of the loan you’re interested in is quoted at 5%, this means all the annual costs spread out across the year come out to 5% of the amount being borrowed. Here’s a straightforward example: If you take out a $10,000 loan with 5% interest and pay it back over an agreed-upon 5-year term, you’ll eventually pay back $11,322.
What is the term length?
The term of your loan is the amount of time you have to pay it back, and it differs from one loan to the next. Loans with a longer repayment term are usually tied to bigger loans, and sometimes allow for a lower interest rate, making it ideal for those bigger purchases.
The length of the loan doesn’t always dictate how you pay it back. Loans with a 10-year term length, for example, can often be paid back sooner. Remember, if you pay off your loan in advance of the term limit, you can avoid the interest you would’ve accrued over that time.
Ultimately, you need to make sure your loan works for you (not against you!) and fits into your budget. Make sure you aren’t taking out a loan when a bit of budgeting can save you the interest. And before taking the dive into debt, ask yourself why you need a loan, how much money you need, how much it costs, and what the term length will be. These questions can help guide you to the proper loan amount that you are looking for, the right lender, and the right path to financial success.