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.
Benefits of Obtaining a Personal Loan
When you need additional funds, personal loans can be a helpful way to obtain those funds when you need them. For instance, if you are confronted with an emergency, you might find that you do not have the financial resources necessary to meet your requirements. If you are preparing for a significant life event such as your wedding, you might find that you need some additional funds to help pay for it. Personal loans can be a lifesaver in situations like these and a great many others as well.
If you’re wondering how a personal loan could be useful to you in your life, the following is a list of some of how you could benefit from getting a personal loan.
1. It’s possible for you to pay for unexpected expenses without depleting your saving
Things come up in life, and sometimes you do need to have access to funds for an emergency. Unexpected costs like medical bills, auto repairs, or the purchase of a new appliance may wipe out all of your savings. This can be concerning because it leaves you open to the possibility of additional unanticipated costs in the future. Taking out a personal loan can be an effective way to cover necessary expenses while still allowing you to maintain a comfortable cushion in your savings account.
2. Helps you to consolidate high-interest debt
If you have outstanding credit card debt, then each month you are probably accumulating a significant amount of interest charges. It is going to be even more difficult to get ahead of your debt if you have multiple credit cards that are accruing interest at the same time.
Personal loans enable you to better manage your debt. You can pay off the balance on your credit card debt using money that you have borrowed through a personal loan. This will allow you to consolidate the money that you owe, provide you with a monthly payment that is set, and provide you with an end date for when the loan will be paid in full.
Personal loans, on the other hand, typically have interest rates that are lower than those associated with credit cards. Because of this, you will be able to pay off your debts more quickly, which will, in the long run, save you money.
3. You can finance your wedding or dream vacation
When the most important moments of your life arrive, it’s possible that you won’t be able to afford everything you’ve always wanted to have happen. Personal loans can assist you in paying for a variety of expenses, including your wedding, honeymoon, or vacation of a lifetime.
4. Have predictable payment schedules
Once you take out a personal loan, the term and interest rate are fixed. Having a set amount to pay makes it much easier to plan your finances. Compared to credit cards, which have a revolving monthly payment that depends on how much you spend, personal loan payments are much more predictable.
5. Have flexible usage
The ability to adapt to changing financial circumstances is one of the primary advantages of a personal loan. Personal loans, in contrast to mortgages, which can only be used to purchase a home or a vehicle, can be put toward virtually any expense that the borrower deems necessary. Borrowers have the freedom to use the money however they see fit, whether that be to start a business, pay for a wedding, or consolidate their debt, as there are no restrictions placed on how the money can be used.
6. Helps you build a credit score
If you are trying to improve your credit score, a personal loan could be of assistance to you.
Your credit mix, which refers to the various forms of credit you have used to borrow money in the past, the length of your credit record, and your credit utilization ratio are all factors that can help build your credit score when combined with the assistance of personal loans. When you get a personal loan for the first time, your credit score may temporarily drop. Your credit score will improve provided that you continue to make timely payments toward the loan balance.
However, you should exercise some caution in this situation. If you do not already have good credit, it is possible that you will not be able to obtain a personal loan with a very favorable interest rate. The combination of a high annual percentage rate (APR) and fees could put you in a position where you are unable to repay the loan, which would be detrimental to your credit score.
Keep in mind that if you are unable to pay the monthly payments that are due on your account, your credit score will go down, which will defeat the purpose of your original actions.
7. Can borrow large sums of money than a credit card
The monthly spending caps on your credit cards may be relatively low due to the particulars of your financial situation. The use of a credit card to finance expensive purchases can be made more difficult as a result of this. A personal loan is an option to consider in this situation.
Because you will receive the entire loan payment at once, it may be simpler for you to make a large purchase, consolidate your debt, or use the loan for another purpose all at once. You will also have a fixed interest rate and a predictable monthly payment, which will make it much simpler for you to manage the loan.
Why this is important: If you receive a lump sum payment with a fixed interest rate, it may be simpler to manage, and it may also help you avoid making late payments.
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.