This question is one that everyone should ask themselves before they borrow any money, but most people tend to ignore. It is extremely important though and something which should always be considered.
If you take out a mortgage, your will find that you will get a calculation of how much you will pay out during the term of the mortgage overall so an addition of the repayment and the interest amounts including costs and this will give you a complete idea of how much the house will actually cost you. At one time it was said that you would pay for a home three times before you completed your mortgage, but these days interest rates are lovely and people have offset mortgages and understand the benefits of paying them off more quickly. However, when you take out other types of loans, you do not get a breakdown like this and so it is up to you to calculate what the cost will be.
All loan costs will tend to vary. This is normally due to the fact that the bank base rates can change on a monthly basis and these will affect any loans that you have with variable rates. However, you can still calculate how much it will cost based on the current rate so that you get some sort of idea what to expect to pay back. You can use this as a way of comparing the costs of different loans. It can be tempting to just compare interest rates, but this is not the only factor that will have an effect on the cost. You may also have to pay fees or charges, which will need to be accounted for. You will also need to consider that how long you are repaying for will make a difference.
Some loans have regular repayments and so you will know exactly how many repayments you will be making and will be able to do this calculation. However there are some types of loan, such as an overdraft or credit card, where repayments are different. Basically you can hold the debt as long as you wish and how much you repay and when you repay will be up to you. This can mean that you have little motivation to make repayments and so you leave the debt outstanding. The interest will pile up and this means that the cost will increase as well. Basically, the sooner you can pay back the loan, the cheaper it will be.
There may be lifestyle costs of having a loan as well as financial costs. You will need to find the money each month to make the necessary repayments and this could mean that you will be left without money for other things. It is therefore really important to look at how much you will have to repay and when and make sure that you are happy with this. Think about the impact that will have with regards to your spending and what things you will be able to afford. It is extremely important to make sure that you will be able to cover the cost of all of your essentials as well as your repayments, but also consider luxury items as well. Most people spend money on luxury items as well. This includes things like gifts, clothes, household items as well as mobile phones, broadband, television. Consider whether you will need to cut down your spending to afford your repayments and whether you are prepared to do this. You may have to go without quite a few things and depending on the term of your loan, this could be for years.
Some people also find having a loan stressful. They worry about the fact that they have a debt hanging over them. They may be stressed by making sure they have enough money to make the repayments and worried about the future and whether they will be able to continue to make them if their circumstances change. If the loan is a long term one then this stress could be extremely unhealthy.
So each loan has a different cost and the cost of loans may not just be financial ones. It is important to make sure that you calculate the cost as best as you can and give a lot of thought to whether you think that the loan will be good value for money and whether it will still allow you to have the quality of life that you desire.