In almost every turn in your financial life, taking out loans will seem to be a constant in reaching your financial goals. When you want to buy a house, you will consider taking out a mortgage loan or when you need to buy a car, you will take out an auto loan. The same goes for higher education where students and their families are depending on student loans to cover the cost of attendance.
This results to households carrying numerous debt accounts at various amounts and different interest rates. Nerdwallet.com explains that for credit card debt, the average balance consumers have is at $15,000. The highest debt account in a household is usually the mortgage loan at about $150,000 and student loans averages $32,00.
Dealing with debt payments in your household budget is a tough situation but a necessary one for most consumers to realize their life goals. The American dream of owning your own house or going to and even finishing higher education are riddled with debts because taking out loans to be able to pay for them is usually the most obvious choice.
Loans are not automatically a bad idea because they can help you realize your financial targets in life. But there are a lot of consumers who are trapped in their loans and they cannot seem to get out of it. They start to blame the loans for their misery and wish that they have not taken them out. The debts that they incur in their cards also drags them down and they blame the purchases they have made.
But they need to remember their original intention in getting the loans in the first place. The mortgage was to get the house where they live in, the auto loan is for that car that they use to get to and from work. And those student loans allowed them to graduate with their degree that played a part in getting the job.
What to remember when taking out loans
But it still does not discount the fact that there can be errors in the way you take out the loans that can aggravate future situations. Here are some of the things that you need to keep in mind when taking out loans to make sure that you are all set and minimize problems along the way.
- Thinking short term on the loan use. Most of the big ticket items in loans are meant to be repaid back for at least a couple of years. This goes to show that loans are long-term commitments and if you cannot seem to see past your immediate need and not plan for repayment for years to come, you will have budget problems. No one can predict the future but if you already have a decent monthly budget, you would have an idea how your loans will have an effect on your budget and more importantly, your monthly cash flow.
- Emotionally-charged loan application. When you are emotionally-charged in life like being very happy or very sad and depressed, you must refrain from taking out loans and making financial decisions that will impact your life in the years to come. It is ok to go out to dinner or have a few drinks with friends to rather than going to a bank and taking out a mortgage loan in another part of town just to get away from a bad relationship. It might not be wise also to go back to school just to be with your partner or get a new car because you got a promotion at work. It is important to make informed financial decisions because repercussions can last for years.
- Scanning through the fine print. This is actually one of the rules of credit card use and should be part of every loan you take out. The fine print represents all the agreement that you are essentially signing off on and would form the legal basis of your relationship with your lender. It is not enough that you have an idea about your loan. When you are taking out loans, you need to understand the ins and outs to manage repayment better.
- Co-signing is a dangerous motive. Consumerfinance.gov shares that in 2011, almost 90% of private student loans were cosigned for students. It can be parents or sometimes even grandparents and they are the ones that are usually at the losing end of this deal. The way it works is that students who has less than appealing credit scores asks relatives if they can take out loans for them. This usually means that cosigners use their own credit score and put in on the line for the student to get the loan. As they do this, they become equally responsible for repayment of the loan and their scores takes a hit when the student does not pay up. You need to keep in mind that there are other ways to help a student with their cost of attendance apart from letting them use your own credit score.
- Blundering with the loan paperwork. After you have decided that the loan is something that you will benefit from in the long run, you might leave it up to your lender to make sure that your application is in order. When you are taking out loans, you need to make sure that you are providing accurate information to your lenders so they can make honest assessment on your finances. Leaving items unanswered or failing to submit some documents or even lying in your application can lead to disaster in your loan application.
Paying down loans more efficiently
Now that you have taken out the loans, the next step is to make sure that you are able to repay them on time everytime. Missing out on payments will have negative effects on your score and hurt your chances of getting favorable credit conditions in the future.
- Consolidate loans. There are different kinds of debt consolidation that consumers can look into and benefit from. Consolidating your loans helps manage the repayment and even lower down the interest rate if your credit score has improved from the time you took out the initial loans. This helps you save money every month which you can use to aggressively pay down other debts or even build up your reserve funds.
- Enroll in auto-debit program. Once you consolidate your loans, you can look at automatic payments and make repayment a little easier. The only thing you need to make sure of is that you are able to fund the account so payments can be made.
- Make extra payment against principal. When you are applying for loans, try to see if your lender would agree to principal payments along the way. If you are able to lower down your principal payments, you get to save on interest payments and pay-off your loans at a much faster rate.
- Make bi-weekly payments. If your income allows it, try to speed up your payments by making two payments a month. You are essentially cutting down your repayment period into half. If you can make the second payment all go to principal, you will see your loan cit down drastically.
When taking out loans of any kind, be sure to make informed decisions to make sure that you are proceeding with caution. You are getting yourself into a situation where repayments will take years to pay off and you better be sure that you are doing it for all the right reasons.