Before you apply for a loan from any bank or financial institution, be sure you will be able to repay that money with the added interest every month without forfeiting other important financial areas, such as savings or rent. Many people fall behind in their payments because they are caught by surprise by other, more immediate expenses. Try to avoid this ‘either/or’ scenario, as this will help lighten your overall debt burden.
Nitesh Patel, Head of Inclusive and Middle Markets at Standard Bank shares four basic approaches to managing loan repayments:
Make your loan repayment a priority
Regard your loan repayments in the same way you would view your payments for such essential things as rent, food or electricity – reducing debt should be a priority. Set aside the money for your monthly repayment before you think about spending on non-essential or luxury items – including entertainment, clothes or restaurant meals.
Stay one payment ahead
As early as possible after taking out your loan, set aside enough extra cash to make an additional payment. The result is that if you happen to find yourself in some sort of financial emergency, you will not have to worry about being late with a payment.
Pay extra
If you set aside a little additional money and make the occasional extra payment, you will see several benefits, such as protecting your credit record (a summary of your financial history kept by credit bureaus and analysed by financial institutions to determine whether they can trust you to repay a loan). All banks will report your credit activity to the major credit bureaus. By paying more, your loan will also end up being paid in full before the agreed settlement date, which means you will pay less on interest charges over the life of your loan. Small, regular payments really add up.
Avoid late payments
If you have a number of monthly expenses, it’s easy to forget to manually repay a loan, even if you happen to have the money. Late loan repayments will end up costing you unnecessarily, because a late fee will probably be added. The best way to avoid this is to set up a monthly debit order on your bank account. By ensuring your available money is sent to your debtors automatically, you can avoid any penalty fees and easily maintain a favourable credit record – which increases your chances of not only another successful loan application later, but you’ll find yourself eligible for more money on credit and at more favourable interest rates.
“To manage your repayments wisely, it’s vital you see loans as a means to end, like a fully paid-off house or car, rather than an end in itself,” adds Mr Patel. “Avoid taking out loans for the sake of having money to burn; rather see credit as part of a structured, long-term plan that, if implemented responsibly, will help you to achieve the life you want. Remember, all the money you borrow will have to be repaid, so there’s no way you can borrow yourself out of debt.”
