Loans 101
Thursday, June 11, 2020, 6:00 AM | Leave Comment
Let’s be honest. Achieving financial stability is no easy task. That’s why taking steps to secure yours and your family’s future is important.
Be it investing in your child’s education or starting up the business you’ve always planned, this often comes with a price but can generate bigger rewards in the future.
Thankfully, there are ways you can take to leverage in reaching your financial goals.
Taking on loans is a relatively easier way to finance your investments and secure your future.
But before you jump straight with applying for a loan, here are some of the few things you must know.
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Understand what loan is
It’s important to know the advantages and disadvantages of each type of loan for you to identify which one will suit your needs. Some of the most common loans are:
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Secured loans
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Unsecured loans
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Only Ever Borrow What You Really Need
No matter how sensible you might think you are when it comes to money, when somebody presents you with an opportunity to get cash quickly, it can be very tempting to take as much as you can.
The best way to prevent interest spiralling out of control is to see this transaction to borrow from yourself. As soon as you receive your next salary payment, ensure that you use as much as you can afford to make your repayments.
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Make a detailed plan of what the money will be used for
If you need to pay for new clothes for the kids or perhaps a weekly grocery shopping trip, try to estimate how much this will be by doing some research. Allocate specific amounts for every area your salary is not currently covering and be as conservative as possible if you can. The less you borrow, the less you will have to pay back.
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Compare Lenders in Detail
Every lender is different, and they all come with their own set of drawbacks and advantages. Legitimate lenders are regulated and controlled by a central agency. If you find an offer or an interest rate that seems unusually low, always check that you’re dealing with a legitimate, legal lender.
Illegal money lenders use unscrupulous practices to trick customers in to agreeing to terms that are unfair and are also potentially dangerous. Responsible lenders will have good customer service, clear information about their products and they will also be able to answer any questions confidently.
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Prepare to live on less for a while
This is never a prospect that anybody likes to think about but if you want to pay off a salary loan quickly and without incurring too much interest, it’s the most sensible approach to take. After you have taken out your initial salary loan, investigate the areas of your daily life where you can realistically reduce spending.
Going without a streaming service or a couple nights out can make a surprising difference to the amount you can afford to pay back each month. Though you probably won’t enjoy it at the time, you will thank yourself when the loan is paid off quickly and cheaply, rather than taking years and costing you more than you can afford.
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Understand Penalty Charges
If you miss a payment on a loan that you have agreed with a lender, you are likely to be charged a penalty fee on top of the existing amount you owe. How to Get Out of Debt Faster – Good Cheddar can help you with tips on how to get another loan in no time. This can come as a nasty shock to some people, especially if they have rushed in to taking out the loan without considering if they can really afford to pay it back.
Ensure that you ask about penalty charges if they are not clearly mentioned on the website or anywhere in the information you are given. All legitimate companies will be happy to explain how their policies work.
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Use Apps to Manage Your Money Effectively
Once the loan has been approved and the money is in your account, if you aren’t careful, it can end up being spent on things you don’t really need. Contactless payments, impulse buys and direct bank transfers you may have forgotten about can end up eating into your overall amount, so consider using apps to earmark specific amounts of funds for essentials. There are a range of free apps available and many of the newer banks provide this service as standard.
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Make Your Money Work for You
If possible, try to use some of your salary loan in a way that will help you to generate an income or financial return. This could be in the form of an investment, such as repairing a vehicle or buying a laptop for a home business, but it could also be worth looking at things like reselling items online or buying low risk shares. This is only really an option if you have already accounted for your essentials, but it can be a way to make some of the repayments a little more easily.
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Never Borrow When You’re Out of Work
Payday or salary loans have their name for a good reason. If you aren’t working and have no means of generating an income, never consider using this type of loan as a substitute for working. Most providers will be reluctant to offer you a loan if you can’t demonstrate that you have a steady income and those that do are likely to charge extremely high levels of interest. Use alternative options if possible and always remember that you can’t borrow your way out of debt.
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Plan Repayments in Advance
The last thing you want is to be worrying about where your next repayment instalment is going to come from. Deliberately set aside a portion of your salary each month so that you know for sure that you can comfortably pay back what you owe while still covering the basic cost of living.
Requires you to pledge a collateral. Collateral is the lender’s guarantee in case the borrower fails to pay off the loan. E.g. car, house, savings accounts
Often comes with a lower interest rate
Examples of secure loans: title loans, home equity loans, pawn shop loans, secured personal loans
TIP: Taking secured loans runs a risk of you losing the property you offered as collateral. Make sure to keep up with payment schedules to avoid this from happening.
Does not require any collateral
Commonly used for a variety of reasons. E.g. weddings, education, home improvement
Best for those who want to pay off high-interest credit card debt
Example of unsecured loans: Personal loans, payday loans, credit card cash advances.
TIP: Taking unsecured loans requires responsibility. Even if unsecured, this loan will still have an impact on your credit score, which would determine the ease of your access for more capital moving forward.
A credit score is one’s ability to pay for credit on time. Your credit score is not just based on your income, assets, age, gender, affiliations, and non-credit banking information such as saving accounts, checking accounts, etc. It is primarily calculated based on your credit payment history, the amount you owe or credit utilization ratio, length of credit history, types of credit used, and new credit.
Credit scores usually range from 300-850 with the latter being the highest. If you have a higher credit score, the better chances you have of having your loan approved. Banks and other financial institutions use credit score to identify whether a borrower is eligible for a loan or not, that’s why it’s important to keep your credit score as high as possible.
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