Before you take out home loan, auto loan, or personal loan, there are a few things you should consider. The first thing you should consider is if you really need the loan in the first place. When you take out a loan, you owe a lending institution money. This means that you need to pay it back over some term of the loan. We all don't have the money up front for major purchases. This is the reason for a loan in the first place. However, consider that you will need to repay the loan no matter how little or how much or how long of a time before the loan is complete.

5 Things to look at when taking out a loan

1. The interest rate
2. The term or length of the loan
3. Penalties for early payment
4. Opportunity cost of borrowing money
5. Type of loan

Interest Rates Matter:
What's the difference between 5 and 10 %? A whole lot…That's what. If you borrowed $10,000 at an interest rate of 5% over a five-year term, your payments would be $188.71 per month. If you paid a 10% interest rate, your payment would be $212.47 per month. At the end of the five-year term, the difference in total payments for the 10% loan vs. the 5% would be $1,426. Just think about what you could do with that money!

The Longer the Term of your Loan, the more money you pay:
Let's continue with the example above. If you borrowed $10,000 at an interest rate of 5% over a five-year term, your payments would be $188.71. If you borrowed $10,000 at an interest rate of 5% over a three-year term, your payments would be 299.71. Your total savings by paying off the loan in three years is $533.04. If you can swing it, you should almost always go with a shorter term loan.

Penalties:
Before you sign on the dotted line, check the fine print to see if there are penalties for paying off the loan early. You might be surprised with what you find.

Opportunity Cost:
Before you take out a loan, consider the opportunity cost. Do you really need that Sea-Doo, Motor Scooter, or Ski Mobile? You may want to consider other options for recreation activities or options with renting when you want to use something. The money that you will be spending on you loan could be put to use in investments, which over time will help to build your wealth. Co, consider if you really need that loan or is it for something that can wait?

Type of loan:
Before you take out your loan, consider your loan options. Should you roll your loan into a mortgage payment and receive tax deductions? Should you use your credit card at a low rate and build points? Should you go to your credit union because they have a special offer with a low rate and no payment penalties? There are pros and cons to different loan options and you should shop around before you make your decision.

Written by moneyadvise.com editorial staff