Most people have times in their lives when they need to use some form of credit. This is not necessarily an issue if loans, and other forms of credit, are managed effectively. However, if this does not happen, you can quickly find yourself in the middle of a financial nightmare.
For this reason, you need to make sure that you pay attention to managing your loans. You also need to think carefully before using any form of credit, such as paying with a credit card. Here are five tips to help you keep your loans under control and make you think before taking on credit.
Only borrow when you have no other option
You need to realize that when you borrow money there is always a cost that you have to pay, in the form of interest. Therefore, you should only ever borrow money when there is no other option available. As an alternative to borrowing you could:
- Take on a side hustle to earn more money. When choosing a side hustle it helps to make use of any talents that you already have, such as the ability to teach music or a talent for writing.
- Re-evaluate your budget so that you release more money to spend on essential items. If you have short term money needs, you may want to consider creating a bare bones budget. This means that you only allow for spending on essential expenses. Any money that is left over can then be used as an alternative to borrowing.
- Declutter your home and sell unwanted items that have value. You can hold a yard sale to make these sales, or use online sites such as eBay. Selling items in this way releases cash for you to use.
You should also think carefully about your reason for borrowing. It’s a good idea to only borrow to purchase an item that will retain its value or appreciate in value.
Do not borrow more money than you need
Just because you are able to get a personal loan for a large amount, this does not mean that you should. It can be tempting to borrow a lot of money, to give yourself more financial freedom. However, this means that you will be in debt for longer than you need to be. It’s important to think about how this will affect tomorrow rather than concentrating on today.
Instead of borrowing to excess, you should adjust your lifestyle so that you only spend what you can afford to. This means that you are more likely to only borrow as much money as you need for a dedicated purpose.
Check for low interest rates
It’s never a good idea to automatically apply for a loan from the bank that you normally use. You should always shop around and take a look at different interest rates. However, you should also remember that it’s not just the interest rate of a loan that you need to consider.
Check that there are no other charges or restrictions associated with the loan. For instance, there may be early repayment penalties in place. This means that you will not have the option to repay the loan early and save on the amount of interest paid. You may also find that a loan comes with compulsory insurance purchase attached to it. Finding the most cost effective borrowing option takes time and patience.
Plan when you are going to need to borrow
Ideally, you should never borrow at the last minute. Doing so makes you more likely to accept a loan that is not the best option for you. It’s best to plan when you are going to need to borrow money.
This gives you more time to search for the best borrowing options. It also means that you may be able to get pre approved for certain loans such as a mortgage. Planning in this way can save you a significant amount on interest payments.
Pay off loans as quickly as possible
It’s not just applying for loans that needs to be carefully managed, you also need to pay close attention to paying off your debt. The sooner you pay your loans off, the sooner you can become debt free. There are several things that you can do in order to pay off debt as soon as possible.
- Make payments bimonthly instead of monthly.
- Ensure that you always pay at least the minimum amount off each debt every month.
- Put extra money available towards paying off credit card debt first. This is because this type of debt tends to attract high interest rates.
- Pay off smaller debts first. Doing this means that you end up having more money to put towards larger debts. This is called the snowball effect.
Taking these actions means that you can get free from debt as quickly as possible.
Taking out a loan is not something you should necessarily avoid altogether. There are times when borrowing money may be necessary. However, it’s important to try and plan your borrowing ahead of time.
You should also stick to borrowing only as much as you need to. Failing to do this means that you take on more debt than you have to, which can end up causing you stress for several years.
Once you have taken on a loan, you should do what you can to pay it off as soon as possible. Having the ability to do this is important, which is why you should not take out a loan that comes with early repayment penalties. Putting any extra cash that you have towards paying off your debt makes good sense. It allows you to get free from debt as soon as possible.
Once you have paid off your loans, you should consider putting the repayments you have been used to making towards your emergency fund. Doing this increases the amount of money you have available should unforeseen circumstances happen. This makes it less likely that you will need to borrow money in the future.