Borrowing money can be an effective way to make a purchase now while making payments later. Many people borrow money to buy homes, buy cars or to make improvements to property. However, you have to make sure that you can repay your loan in a timely manner. How do you make sure that you do that?
How Much Can You Afford to Repay Each Month?
You should never borrow more than you can afford to repay each month. Therefore, you should create a loan schedule based on the amount that you can repay without impacting your overall financial situation. Therefore, if you can only dedicate $100 a month in loan payments, you need to structure your loan to keep payments at or below $100 a month.
Can You Make Extra Money?
Ideally, you will pay your loan off as soon as possible. The sooner your loan is paid off, the less interest you will pay to the lender. If you know that you will receive a bonus at work or that you can get a second job to make extra cash, you should put that money toward your loans. Making even one extra payment every six months could reduce your loan term by several months or years.
The Lender Should Show You an Amortization Table
Your lender will generally base your payment amounts on an amortization schedule. Sometimes, you will be shown this table when you sign your loan documents. However, you may have to ask to see it either when you borrow the money or at any point after the loan money is disbursed. There may also be online amortization tables that you can use to help develop a payment plan that you can stick to. What this does is shows you how much of your payments go toward your principal balance and how making extra payments can lower your overall borrowing costs.
Make Your Own Timetable Based on Your Ability to Repay Debt
You don’t have to rely on the lender’s amortization table or any other schedule that doesn’t fit your needs. If you want to repay a $10,000 car loan in 18 months, you can generally do so without paying a penalty. If you want to repay that loan over 81 months, you can do that too assuming the lender will stretch the loan term out that long. Whatever you do, make sure that you make each payment on time to keep your credit score as high as possible.
When you borrow money, you must pay it back or face financial and legal penalties. While your lender will work with you as much as possible to keep you on track, it is ultimately up to you to create a payment plan that best meets your needs and budget.Tags: featured