Paying Off Your Loan

Thanks go to Amanda Webb of Lifeline, Darling Downs, Queensland for this article from their own newsletter

Having made the application and getting your loan approved is the first step in either sinking into the debt hole or acquiring instant cash to move ahead. How you pay off the loan will determine which applies to you.

Having a well thought out plan of action for paying back the loan quickly can actually save you money.

To react to a financial crisis where there is great pressure to do it immediately, is generally stepping into a debt hole. This can occur because of pressure from other creditors, salespeople, family or others to borrow to pay, buy or lend to them, and there is little, if any, time to think through the long-term consequences of borrowing that money. Slow the process down. If you were unable to borrow money, what will happen?

Some clues: If you are borrowing because of some perceived or threatened urgency, (it won’t last on the floor at this price) consequence (we will take legal action), or ‘subtle’ blackmail (if you loved me you would), then rethink before borrowing. The benefits of buying an item on sale with borrowed money could cost much more when you pay the interest (credit cards not fully paid each month included).

Having a well thought out purpose means that the use of finance has been researched and the benefits and possible downsides have been considered. You know how much you can afford to pay back. You may have requested the loan over a shorter or longer period (with slightly lower monthly repayments) but fully intend to repay more and more often than the contract stipulates. You may also have opted for consumer protection insurance, which could cover the loan for loss of work/income. The insurance may be through any number of companies offering this protection and not necessarily through the financial institution that you get the loan from. Check the length of time the insurance will pay (sometimes it is only 3 months).

There are a number of ways to save money when paying back a loan:

• Pay the first monthly instalment, as an extra payment, as soon as possible after receiving the loan (within a few days) and make each payment by the due date. This will save interest (often equivalent to 1 months payment) and reduce the length of the loan
• Pay extra. As much as you can, as often as you can especially IN THE EARLY MONTHS OF THE LOAN.
• Pay the loan off weekly or fortnightly (some loans have a penalty for doing this but it may still be more beneficial to pay the penalty)... Ask questions and calculate your own figures.
• Pay more each payment. On a 5-year loan for $10,000 an extra $20 per month reduces the overall interest by several hundred dollars and several months off the length of the loan. Depending on the lending institution
• Review your borrowing from time to time. Consolidating existing loans can save money depending on the lending institution.
• In reviewing your borrowings, consider
• switching your loan to a loan with a lower interest rate
• moving to a lending institution with no monthly fees
• Most Important, take into account the costs of making a move – the set up fees and charges.
• Some credit cards have interest rates less than personal loans
• It pays to shop around
• Do Not Gamble to try and win money if you are short on a loan payment. Pay what you can and bring the loan up to date as quickly as you can. Explain to the creditor that you are having difficulties and what you are doing to fix the problem and a time frame. If a time frame is not possible, then arrange when you will give them an update.

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