Thinking of taking out a loan right now? Here’s why it can be risky
It is worth weighing the pros and cons of taking on new debt, especially now.
- Unless you have your financial ducks in a row, loans can be risky.
- You can’t predict the future, but you can make measured decisions.
As you’ve probably heard at least 1,000 times, no one can see the future. As much as analysts would like to be the ones to correctly predict financial downturns and recoveries, the predictions are notoriously “uncertain”.
When you’re wondering if you’re ready to take on new debt, these common risks can give you food for thought. Taking out a loan right now is risky if:
- You do not have emergency savings account. If you don’t have enough money set aside to pay at least three to six months of bills, new debt could get you into trouble if something bad – like another pandemic or job loss – happens. was producing.
- You have not developed a monthly budget. If your budget involves flying by the seat of your pants instead of knowing exactly how much you can afford each month and planning for the future, now might not be the time to take on new debt.
- You couldn’t cover an unexpected expense without using a credit card. Unless you have the money to pay for living expenses and cover an emergency or two, taking on new debt is a risk.
- You often borrow money to get through the month. If you borrow money from friends and family, it means your monthly budget needs to be adjusted.
- You’re in a new job and you don’t know if it’s right for you. Getting into debt can tie you into a job you don’t like. Make sure you love what you are doing before taking out a loan.
- Your job is not secure. If your job is shaky or you work for a company that layoffs at the first signs of an economic downturn, think twice about taking out a loan.
- A loan would prevent you from doing anything else you want to do. Let’s say you dream of taking a vacation at least once a year and taking on new debt would be tantamount to giving up on that dream.
Things to consider
Before making a final decision, take a moment to consider whether the economy is likely to make it harder or easier to repay the loan.
You can’t listen to the news without hearing about a recession. Some say we are entering a recession, while others say we are in the middle of one. But what is the truth, and what can we expect? Is it a good time to borrow money or not?
Here’s what we know: The National Bureau of Economic Research’s Business Cycle Dating Committee tracks US recessions. The committee defines a recession as “a significant decline in economic activity spread across the economy that lasts for more than a few months.”
In short, we are not in a recession. Here’s how we know:
- At 3.6%, the unemployment rate remains low
- Job growth remains robust
- Consumer spending remains high, despite inflation
- After a period of healthy growth, the US economy contracted at an annualized rate of 1.4% in the first quarter
The scary stuff
We may (or may not) enter a recession. But if we do, it’s not the end of the world as we know it. The United States has been through 13 recessions since 1945. On average, each recession lasted 10 months. The Great Recession was the most protracted post-war recession, spanning 18 months between 2007 and 2009. The COVID-19 recession was the shortest, lasting only two months due to declining interest rates and stimulus funds.
Light after the storm
While the average recession lasted 10 months, periods of growth and expansion lasted 57 months. In other words, once we’ve gone through the painful process of recession, we usually have better days on the other side (with more valuable portfolios).
Recessions come and go, but once you’ve gotten a new credit card, bought a car, or taken out a personal loan, you’re responsible for making the payments as promised, regardless of the state of the US economy.
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