Loans are always seen as an evil thing or the cause of financial distress for millions of people. The truth is, almost all of us will take out some type of loan at some point in our lives. You don’t even need to be in financial turmoil to get a loan; many people use them to spread the cost of big payments over many months. For example, instead of spending £10,000 on a car in one go, you get a loan to pay for it, then make your monthly repayments.
The biggest problem with loans is the part where you pay them back. So many people make common mistakes here, which lands them in a lot of debt and financial distress. Keeping that in mind, why don’t we look at two of these errors to ensure you don’t make them if you’re repaying a loan:
You should always, always, always try to set up loan repayments via direct debit. This ensures that the money leaves your account at the same time every month, meaning you never miss a payment. Missing your loan repayments is a big problem because it usually means additional fees and charges, on top of interest rates. As you can imagine, this means you’re paying back more money, which can be harder for you to do.
Lots of people end up in debt because of this; they miss a couple of months of payments, they can’t afford to pay off what they owe because of all the extra charges. So, they keep missing more payments without paying off the total balance and a horrible debt spiral emerges. Avoid all of this by paying for things on time, every time.
Borrowing too much money
As a species, we can be pretty greedy. Humans always want more more more, and this is never more apparent than when we apply for loans. Whether it’s short term loans or business loans, we try to get as much money as possible – regardless of whether or not we need it. You think this is smart as it means you have more money to use, but it’s rarely a good idea.
Instead, it means you have more money to repay, meaning larger repayments every month. This can be challenging for you to cope with, particularly if you have some additional expenses for one month. Before you know it, you’re in the position we spoke about above: being unable to make your payments every month. From here, the debt spiral starts again and you owe so much money. It can all be avoided if you borrow a conservative amount. Look at your finances, work out how much you can afford in monthly repayments, then get a loan that works for you. This might mean borrowing less money than you hoped, but it will stop you from being in lots of bad debt.
If you borrow too much money, you will start missing payments. Similarly, you can still miss your payments if you borrow small amounts – either because you don’t have the funds or you just forgot. Avoid both of these mistakes when repaying a loan to ensure you aren’t spiralling out of control and can repay everything as quickly as possible.