Obtaining a loan is a big step in your financial journey. Oftentimes, it signals that you’re ready to make a big investment like applying for a mortgage or putting a downpayment on a car—which is exciting! But there’s also a dark side to loans. If they’re not managed properly, you could end up getting into a cycle of debt that’s nearly impossible to settle. Or worse, you may have your financial assets seized if you face debt and IRS collection penalties.

In order to determine whether you should or shouldn’t take out a loan, there are a few things you should consider first:

  • What you’re borrowing money for
  • How much money you can afford to borrow
  • If your credit score qualifies you for a loan
  • How your loan will impact your financial health

What you’re borrowing money for

The first step you should consider when deciding whether or not you should take out a loan is what you plan on doing with the cash that you borrow. Are you buying something you want or need? Will this purchase boost your financial health, or would it harm it?

If you’re taking out a loan to buy something you want but can’t afford, it might not be a good idea to take out a loan until you’re able to dedicate saved funds toward that item. On the other hand, if you’re able to make a sufficient downpayment on a house or car and can afford to make your mortgage payments each month, it might be a good investment option for you.

The main idea is, you should determine whether the item is something that you need or if it’s just something that you want and then, if you’re able to afford it, start building up the funds. Considering these important questions will help you evaluate all of your options.

How much is too much money?

If you do decide that taking out a loan is the right option for you, you’ll want to estimate how much money you can afford to take out. Start by creating a budget ahead of time so that you can see where your income and expenses line up and how much money you’d be able to allocate toward your loan payments.

Your credit score and loan application

Before applying for a loan, you should check to see if your credit score is in good shape. When lenders receive your loan application, they will check your credit history to help them decide if they should approve or deny your loan application.

According to Experian, here’s how credit scores rank among lenders:

  • Exceptional: 800-850
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Very Poor: 300-579

If your credit score isn’t quite where you want it to be, you might consider working on ways you can boost it in the months before you apply. Here are a few tips to help:

How your loan terms impact your financial health

Finally, it’s important to remember that taking out a loan means more than just borrowing X amount of dollars. You’ll have a predetermined period of time in which you can pay off the loan, you’ll have interest to pay in addition to your loan amount, and ultimately, you’ll be making a serious financial decision. Once you have an idea of your loan’s terms, you should be sure to think about how your loan terms will impact your financial health overall.

Before you start applying for a loan, give these guidelines a review to ensure you’re making the best decision for yourself and your finances.