A Helpful Guide to Managing Your Loan Responsibly
Published on: December 14, 2018 . Last updated: July 27, 2020 Category:
Not all debt is bad. When used for the right reasons and managed responsibly, a personal loan can help you meet your short-term goals such as renovating your home, having your dream wedding, or funding your children’s education.
On the other hand, failure to make timely loan payments will get you into serious financial woes, like getting buried in debt. Worse, it can hurt your credit history and make it hard for you to qualify for loans in the future.
You can check this article for other consequences if you stop making loan payments.
Has your personal loan application been recently approved? Congratulations! As early as now, start thinking of ways to avoid the costly mistake of mishandling a loan. Here are some actionable tips on managing your personal loan.
Understand the personal loan terms and conditions.
No matter how busy you are, make time to read the fine print that comes with your personal loan. This is an agreement between you and the lender that contains the guidelines on the use of your personal loan.
Missing important information about your loan could lead to bad consequences, like paying fees and charges that you could have avoided had you read the terms and conditions carefully.
When reading the fine print, look for these crucial details:
- The date when your monthly installments will start and due date
- Repayment terms
- Any additional interest charges for missed payments and computation
- Fees and charges you will be required to pay
- Whether or not the bank will charge a prepayment fee if you fully repay your loan before it matures
- Computation of your monthly installments
- Situations when a borrower defaults on a loan
Know how long you have to pay off the personal loan.
Consider the repayment terms you can afford over a reasonable period. In the Philippines, the shortest loan term is 6 months, while the longest is 48 months.
A shorter loan term means higher monthly installments, but the interest rate is lower than those with longer terms. On the other hand, a longer repayment term comes with lower monthly repayments. But this can set you back in the long term with more expensive interest payments.
If you can afford the higher monthly repayments, it makes sense to go for a shorter loan term. But if you prefer lower monthly repayments, a longer loan term would work even if it means you will pay more interest throughout the period.
Set up a monthly budget and review it regularly.
You have a new personal loan to take care of, and this will affect your finances. You need to adjust your budget accordingly. Of course, you have to prioritize paying off the loan as fast as you can. This will keep you from incurring more debt than you can handle.
Before you spend the money you borrowed, it is important to create a precise monthly budget first. Take into account how much you earn and spend every month. Include all your expenses no matter how small they may be.
From there, determine how much of your income you can allocate for your monthly loan repayments. Make sure to set aside a fixed amount for repaying your loan.
Take advantage of free apps that keep your budget in check. Also, review your budget regularly (at least every 6 months) to see which expense needs tweaking during changes in your income or unforeseen events that affect your finances.
Plan your personal loan repayment strategy.
If you fail to plan, you are planning to fail. This saying could not be truer when it comes to loan repayments. Having no concrete plan on how to pay off your loan is like setting yourself up for failure.
Managing your personal loan responsibly starts with a plan. This is especially important if you have different types of debts to settle, such as credit cards and housing or auto loan.
Look into how much you owe the bank, your loan’s interest rate, your monthly amortizations, and the loan term. Also, list down the due date of each of your loan.
Such information will help you decide which of your loans need to be paid off first. The loan that gets prioritized will depend on your strategy for paying off your loans. It could be the loan with the lowest balance, the one with the highest interest rate, or the one with the earliest due date.
Feeling overwhelmed with managing several loans? You might want to consider debt consolidation to make repayments easier and faster for you.
Use it for the right reason.
Having the right attitude and mindset about money is essential to managing your personal loan. Your loan is not free money—it has to be paid back with interest in monthly installments.
In your personal loan application form, you indicated your purpose for borrowing money. Use the amount you loaned only for its intended purpose.
It is easy to get sidetracked in situations when you think spending a portion of your loan amount would not hurt. It could be a nice pair of shoes or a relative who is borrowing some cash from you.
Those tiny costs could add up and eat a chunk of your loan amount. Before you know it, you will barely have money left to spend for what you originally planned it for.
Monitor all your expenses.
Are you an impulsive buyer? Now that you have a new personal loan to manage, it is time to make some lifestyle changes to ensure that you will never go broke while paying off your loan.
No matter how much money you are making, or whether you have recently given a raise, keep your spending to a minimum.
Keep a watchful eye on your spending. If you don’t, you are more likely to overspend. And when you do, you might have spent your allocated amount for loan repayment without you realizing it. When your due date comes, you will be hard-pressed to pay on time.
Be meticulous when keeping track of your expenses. Check your bank account balance from time to time. Keep all your receipts, billing statements, invoices, and other financial documents so that you know exactly where your every peso went.
Another advantage of monitoring your expenses is that when you are already spending way too much, you will be able to adjust your budget right away, making sure that you still have money to repay your loan.
Find ways to increase your income.
Still struggling to pay off your monthly balances even if you always control your spending? Your income may not be enough to cover all your expenses, including your personal loan repayment.
Consider getting an extra source of income, like a side business or a part-time job. This is just a small sacrifice to make compared to missing your monthly loan repayments and paying more interest in the long term.
There will also be a time that someone dear to you, a family or a friend, will borrow money from you. While you are paying your other debts, consider refusing to lend money to your loved ones so it won’t compromise your own finances.
Avoid taking on new debt.
Thinking of borrowing money again or applying for a new credit card to pay off your existing personal loan? Are you being tempted to borrow money from loan sharks for an easy source of payment? Taking on more debt than you can actually afford is never a good idea. You will only run the risk of racking up more debt. Either you reduce your spending or increase your income. Better yet, do both.
Be diligent and disciplined in paying it off.
It takes a lot of discipline to be able to repay your personal loan every month. But if you are having a hard time keeping up with your obligations, an easy technique is to automate your monthly loan payments.
Stay on top of your loan repayment by automating it via an auto-debit arrangement with your issuing bank. Some personal loan providers already set up automatic loan payments for their borrowers, helping them avoid missing or being late with their payments. That is one less thing to worry about.
Just make sure you always have enough funds in your bank account every month for your loan repayment.
If you’re paying via post-dated checks, be sure that your checking account always has sufficient balance to avoid a returned check fee from Php 500 to Php2,000 per bounced check. If it is possible, contact your lender to request an auto-debit arrangement for your personal loan repayment.
Make your personal loan payments on time.
Paying your balance past your due date will cost you more in the long run. The lender may impose additional interest charges for late payments.
Moreover, you will have to pay a late payment penalty fee for every month that you are delayed with your payment. It could be around Php 500 or 5% to 8% of the amount past the due date. The late payment fee may not seem that much, but if you are trying to pay off your loan fast, that small amount clearly does not help with your goal.
If you’re planning to apply for another loan in the future, late payments can also be a reason for your application to get rejected.
Pay off in advance.
The longer you keep your loan around, the more interest you pay over time. So when you can afford it, pay off your personal loan early. You can do that by paying an amount higher than your monthly amortizations.
Some personal loan providers in the Philippines charge a pre-termination fee, which is around 5% of your outstanding or remaining balance, if you pay off your loan or before its maturity date. If your lender does not charge this fee, then go ahead with your early loan repayment. But if it charges an early termination fee, check how much this will cost you before you decide whether to pay off your loan soon or not.
Communicate and negotiate with your lender.
Have you exhausted all means to manage your personal loan properly but you still fall behind your monthly payments? Do you foresee any financial difficulty coming up? Or there is a sudden financial emergency that has kept you or will keep you from making timely loan payments?
If you find yourself in any of these situations, it is best to reach out to your lender, explain your case, and work with them to come up with a solution. It is better to be proactive now than just let things go out of hand and regret later on.
You may request the bank to restructure your personal loan. This may reduce your monthly installment amount, extend your loan term, or reduce your loan’s interest rate. Of course, such loan restructuring comes with strict conditions that you will have to follow.
Being a responsible borrower entails making every effort to pay off your loan as fast as possible so that you reduce its overall cost. As long as you are disciplined and determined to do so, you are on the right track.