Personal finance is a big issue, one that many people ignore or worry about to the point of panic. The majority of Americans live paycheck to paycheck, with various loans and little savings. Loans are not necessarily a bad thing, in fact, some can be viewed as essential or “good debt.”
However, it’s important to be properly aware of your financial situation – loans included. If you have loans of any kind, it’s time to take ownership of your financial situation and make sure you are properly understanding your various loans and debts. Below are five tips on how to properly manage your loans, along with some other tips and advice.
Types of Loans You May Have
Loans can seem like scary prospects but they don’t need to feel that way. As mentioned, some loans are valuable assets and can be viewed as normal or even essential. One of the biggest loans people take out in their lifetimes will be their mortgage. A mortgage is often seen as a responsible or sensible loan. In general, houses appreciate in value, meaning that your loan can be paid off in full when you sell your home, in many cases leaving you with profit. Mortgages are often low interest too, meaning they are stable and regular payments with little risk.
There are plenty of other loans available. For example, many Americans choose to finance their automobiles. You may decide to purchase a car and pay for it over 3-5 years, which is a normal term for financing a vehicle. These loans tend to also be low risk and fixed rate.
Banks also lend money for a variety of reasons. It could be that you need some money for a renovation or extension to your home. Bank rates and credit company rates vary massively and often depend on your credit score. If you have a poor credit score or high value of credit, you may receive loan offers with high interest, making it more expensive to borrow money.
When money is loaned, it is almost always with an interest rate. If you borrow $10,000 at a rate of 2.9% APR, you’ll pay back the 10k plus 2.9 percent in interest. So, your loan will cost you around $290. This is how the lender makes their money. Interest is charged over set periods, usually yearly, so a five-year loan will cost you more than a two-year loan.
1. Use Loan Calculators
One of the easiest ways to assess a loan’s viability is to use a loan calculator when deciding what to borrow. Almost all financial institutions offer this kind of tool online; you can see an example if you click here. These calculators allow you to get an overview of how much your loan may cost over different periods, what the interest rate is, and how much you will pay back overall. Doing this helps you understand what your monthly outgoings may be, meaning you can properly assess whether this loan is affordable or not. This is a great tool, as some lenders will happily let you borrow even if you don’t seem financially viable, so, you should always check for yourself with a loan calculator.
2. Cut the High-Interest Debt
As mentioned, some loans have much higher interest than others. Sadly, these loans are often targeted at those who have poorer credit, as they are deemed as higher risk. If you have any loans or credit cards with a high interest rate, it’s advisable to pay these loans off first – as quickly as possible. If you keep paying the minimum payment on a high-interest loan, you’re paying huge amounts to the loan company in interest.
If you can afford it, clear your high-interest debt or seek a debt consolidation loan. These loans are designed to pay off all your other debts and put them into one, affordable, low-interest plan. Ask your bank or search online for the best deals for debt consolidation loans to see if one may be able to help you.
3. Switch To Fixed Rates
Sticking with interest rates, it’s always worth checking whether the rate you are signing up for is fixed or variable. Often, mortgages start as fixed-rate loans, switching to variable rates after a few years. This means that once the fixed period is over, your monthly payments could go up. If this is the case, it’s often worth checking out comparison sites or speaking to your current lender to see if you can move your mortgage to a new fixed-rate deal. It’s just a lot easier to know exactly what your monthly repayment will be, avoiding any surprises.
4. Pay Early, if Possible
The longer you have a loan, the more it will cost you in interest. If you get a bonus, pay rise, or another windfall, it’s advisable to pay off big chunks of your loan early, or set up regular overpayments. Almost all providers allow you to do this without charge, meaning you will pay less interest, in the long run, saving yourself money.
A Note on Budgeting
Often, people think having a budget means they are struggling with money. Being smart with a budget means quite the opposite. Being aware of your regular outgoings and incoming payments is a smart thing to do! This way, you know exactly how much per month you have to spend, while always knowing that you have enough in the bank to repay your loans. You may also find that you have enough money left over to start saving for an emergency fund or even invest some money. The smarter you are with your budget, the quicker you can pay off high-interest loans and clear all your debt.
These are just the basics of managing your loans properly. If you need financial advice on any of the above, reach out to a financial adviser. They are best placed to give you advice on your own personal situation, helping you make your finances work for you. They may also be able to access better rate loans than you can as an individual.