3 Questions to Consider Before Borrowing Money

A person wearing glasses and a yellow shirt holds a red binder and books, standing outside near a building.

With so many moving parts and a multitude of loan options, it can be hard to know whether you’re making the right decision. In fact, a high proportion of Americans have regrets around borrowing money that you can avoid by asking yourself the right questions before you sign on the dotted line.

That’s why it’s necessary to ask some key questions before borrowing from anyone. Without these questions, you throw yourself to the wolves and hope that no one takes advantage of you. With these questions, you’re armed and ready to secure your personal and professional future.

Here are three questions to get you the answers you need before borrowing money.

1. What is Your Goal With Borrowing the Money?

For example, let’s say you want to buy a dental practice. However, credit card debt is occupying all of your cash flow and charging you high interest. A beneficial strategy might be to take out a personal or consolidated loan to lower your interest rates and save up cash. In contrast, if a loan will bury you deeper in the hole, and you have no exit plan, you might want to reconsider.

Understanding your goals will help you understand why you want to borrow in the first place. Borrowing money may feel like “what you’re supposed to do,” but that has no bearing on what you need. Your situation is different from everyone else’s.

Above all, you need a lender who has experience in your field and understands your situation. We understand the medical field and strive to make lending as painless and efficient as possible. Once you understand your goal, you’ll know who can serve you best.

2. Will Borrowing Improve Your Finances?

Taking out a loan is never free money, and you need to consider if borrowing money improves your finances. It’s not always clear, which is why there are some questions you can ask.

For one, will a loan help you lower your interest rate? If so, then consolidating your debt to a lower interest rate loan could help you in the long run. However, if a loan means a higher monthly interest payment, take a step back.

Next, will a loan lower your total monthly payment? For example, will borrowing this money directly lead to a higher-paying position? If so, it’s worthwhile in the long run. If not, however, the loan will be a burden more than anything.

Finally, ask yourself if borrowing will reduce the number of existing monthly payments. If you’re able to consolidate three monthly payments into one by taking out a loan, that simplicity and lower interest rate are worth the loan. However, if this loan is just one more to a laundry list, ask yourself if it’s really necessary.

3. Are You Borrowing For Something That Makes or Costs You Money?

Will this loan create more assets or liabilities for you? Anytime you borrow money, you need to answer that question. If not, you’ll find yourself repeatedly borrowing money to pay back other loans. It’s a vicious cycle.

Instead, figure out if you’re investing that loan toward creating assets. You need to understand what things appreciate vs depreciate in value. You also need to understand what makes you money (asset) and what doesn’t (liability). Let’s take a look at a few examples:

  • House: Appreciates in value, but doesn’t directly generate money
  • Practice/Business: Appreciates in value and generates money
  • New Equipment: Depreciates in value, but generates money
  • Car: Depreciates in value and doesn’t generate money

Be extra diligent when borrowing money and make sure that you invest toward something that at least makes you money, if not also appreciates in value. Here’s how appreciation and depreciation work in the market.

If you’re interested in learning more about our services, or how we can help you with your finances as a new or training medical professional, contact us here.

Sources Cited

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