Are You Financially Responsible Enough for a Loan: 10 Questions to Ask

Taking out a loan, no matter the amount, can be a major financial commitment, so it’s important to make sure that you are ready for one before applying. If you borrow money without proper preparation, there’s a good chance that it can lead to financial stress, missed payments, and long-term debt problems. To help you assess whether you are financially responsible enough for a bank loan, ask yourself the following questions.

Do I Have a Stable Source of Income?

Having a stable job, a steady business, or any consistent source of income is crucial when taking on debt. This shows lenders like banks and cooperatives that you have a reliable way to repay your loan, making it more likely for them to approve your application.

Why It Matters:

• A steady income ensures you can make timely payments.
• If your income is irregular or unpredictable, repaying the loan may become difficult.
• If you rely on commissions, freelance work, or seasonal income, consider whether you have enough savings to cover payments during slow periods.

How Much of My Income Is Going Into Debt Payments?

Your debt-to-income ratio or DTI compares how much you earn each month to how much you owe, and helps determine whether you can take on additional debt without financial strain. Lenders typically prefer borrowers with a DTI ratio of 40% or lower, meaning those with low DTI are more likely to get approval for their loan applications.

Why It Matters:

• A high DTI ratio may mean that you are overextended and may struggle to manage new loan payments.
• If you have a high DTI, consider paying off some existing debts before applying for a new loan.

Do I Have an Emergency Fund?

Managing a loan means that your finances will be tied up until the money you borrowed has been fully paid. An emergency fund acts as a financial safety net, and it can help you support unexpected expenses like medical bills or car repairs without compromising your budget.

Why It Matters:

• Without an emergency fund, you may struggle to make loan payments in case of emergencies or financial difficulties.
• Experts recommend having at least three to six months’ worth of expenses saved in your emergency fund.
• If you don’t have an emergency fund, you may want to build one first before taking on a loan.

What Is My Credit Score?

Your credit score is a numerical representation of your creditworthiness, guided by your history in managing bills and debts. This number can affect your loan approval chances, interest rates, and even repayment terms.

Why It Matters:

• A good credit score can qualify you for better loan terms, lower interest rates, and higher borrowing limits.
• A low credit score may mean difficulty getting loan approval or higher interest rates in case you do get approved.
• If your score is low, you can improve it by paying off existing debts and making timely payments on your other financial obligations.

What Is the Purpose of the Loan?

There are several credit and loan product types that are available to individuals and organizations that need an additional injection of funds. Understanding why you need the loan helps ensure that borrowing is the right financial decision for your needs or situation.

Why It Matters:

• A product like Maya Personal Loan may be more ideal for expenses like home repairs, medical emergencies, or education. Maya Personal Loan lets you borrow up to Php 250,000 (approval subject to credit evaluation), so it can help cover more significant expenses.
• For smaller expenses, consider something like Maya Easy Credit, where you can borrow up to Php 30,000. You can take out any amount at any time, as long as you still have an available balance in your account. This type of loan also doesn’t have fixed interest. Rather, you pay a small service fee based on the amount you borrow and a documentary stamp tax.
• If the loan will fund something that won’t generate long-term value, reconsider whether borrowing is the best option.

Can I Afford the Monthly Payments?

It’s a good idea to calculate your monthly loan payments in advance, as this can help you determine if they fit within your budget and in turn, make it easier for you to manage your finances during the repayment period. You can use a loan calculator to estimate payments before committing to a loan.

Why It Matters:

• If loan payments take up too much of your income, you might struggle with other financial obligations.
• If the payments are too high, it may be worth it to consider borrowing a lower amount or looking for a loan with better terms.

Are There Additional Fees and Charges?

Many loans come with fees other than the interest rate, such as processing fees, late payment penalties, and prepayment charges. Make sure to consider these additional costs as they can affect how much you actually pay.

Why It Matters:

• Understanding all of these costs helps you avoid financial surprises.
• Some lenders charge pre termination fees for early repayment, which can impact your ability to pay off the loan faster.
• Comparing loan terms from different lenders ensures you choose the most affordable option.

Do I Have a Plan for Repayment?

Having a clear strategy for repaying the loan is key to preventing missed payments and keeping financial stress at a minimum. If you don’t have a clear plan, you might end up confusing due dates, spending your loan payment for other bills, or making other costly mistakes.

Why It Matters:

• A repayment plan helps you stay on track and avoid unnecessary debt accumulation.
• If you anticipate financial changes like a job change or increased expenses, make sure your plan accounts for them.
• Setting up reminders can help ensure on-time payments and avoid additional fees and charges.

What Happens If I Miss a Payment?

Understanding the consequences of missed payments can help you prepare for unforeseen circumstances. It can also motivate you to meet your deadlines.

Why It Matters:

• Missed payments, or even late ones, can damage your credit score and result in additional fees.
• Some lenders have strict penalties for missed payments, including higher interest rates.
• If you’re unsure about repayment consistency, consider choosing a lender with flexible payment options.

Do I Have Other Financing Options?

Loans aren’t the only way to get the funds you need. Exploring alternative financial solutions may help you make a more informed decision that’s better suited to your current circumstances.

Why It Matters:

• Other options, such as using savings, borrowing from family, or using a virtual credit line, may be more suitable for meeting your need for additional funds.
• Interest-free installment plans or employer salary advances may be better alternatives to traditional loans.
• Weighing all your options helps you choose the most cost-effective financial solution.

Taking out a loan is a serious financial responsibility, and ensuring that you are prepared for it can help you manage debt wisely. By asking yourself these critical questions, you can assess your financial health, evaluate your repayment ability, and make informed borrowing decisions. Knowing the answers to these questions, in turn, lets you take advantage of credit opportunities while maintaining control over your financial future.