Taking a loan may sound daunting and risky, but it is difficult to avoid living a life without a single loan. You could be looking for a student loan to pay for your degree, a couple looking for a home loan – the first step to having your very own family – to buy a house, an entrepreneur looking for a business loan, or you could be looking for a personal loan to pay for unexpected need.
With sufficient preparation, calculation and discipline, taking a loan can be a strategic financial move into the next phase of your life. So what are some important things to take note when taking a loan?
Before Taking a Loan
There are a few factors to consider and the priorities change along with the purpose of taking that loan. Here is a list of common questions to ask yourself regardless of the nature of the loan.
Is it a loan for something important, like making long-term improvements to the quality of life for me and my family?
You don’t need to take on extra debt just for that upgrade to the newest car model if your vehicle that is just a few years old and still working fine. You need to make sure that you are spending money on things that really matter.
Funds going towards a home improvement, towards a child’s education or the start-up of your business can be smart investments and loans can help you achieve your goals for a better life.
2) Affordability / Ability
Can I afford the payments?
Neglected payments can easily snowball into huge debts – amounts that are significantly larger than the original amount that you’ve borrowed initially.
Write down a list of consistent future expenditures. These can be your usual utilities bill, your monthly groceries budget or your insurance payments. You want a payment option where you can continue to save, even if it’s an amount lesser than before.
If you encounter a situation where you cannot make payments on time, you can live off your emergency fund for a while as you continue to pay off your minimum payment at the very least. By listing down your future expenditure and savings, you can calculate an acceptable term of payment that you can afford.
Here’s a quick and familiar example: You paid for a $1,000 TV with a credit card. The bank charges 24% per month for late payments. What happens to the total amount you have to pay per month of delay in repayment?
|Months of late payment||Total Payment||How much more you are paying|
Remember, your TV was supposed to be $1,000 only. If you delay payment by 6 months, you’ll be paying the price of more than THREE TVs. Imagine that effect when applying to bigger purchases like housing or car.
Put away your papers and pens if you’re thinking of doing the calculations, a little further down we’ll show you how you can quickly and easily calculate these numbers.
3) Paying Off
When can I pay off the loan?
Take for example a Housing Loan. Usually you can choose to take short ones (say 10 years) or really long ones (30-40 years). You are committing yourself to paying a certain amount every month.
Do you want to pay off everything early but have less per month to spend, or do you want to pay off everything when you are of retirement age but have less savings? In the next sections we’ll teach you a quick and easy way to calculate and compare, so read on.
Taking a loan can become tedious, especially if you’ve decided to want to pay off early but kept your wallet so tight that you couldn’t think about having fun and live! Ask yourself how long you are prepared to commit to payments. Will you be sacrificing even the simplest pleasures, such as going out to the movies, having a meal outside or going for a short vacation? If your answer is ‘yes’, you’ll need to reconsider a more balanced, less stressful loan.
Preparing to Take the Loan
Your payments also differ on the interest rates fixed to the loan.
A fixed interest rate means that it doesn’t change during the loan term. You’ll know exactly how much each repayment is.
A floating interest rate is tagged to the market and will go up or down as the interest rate in the market changes.
The fixed interest rate is arguably a better option for people who wants conservative payment options as you don’t have to worry about fluctuating payments and can manage your own payment and budget easily.
Calculate How Much Loan to Take
Now that you are sure about taking a loan and found your comfortable threshold in repaying the loan, use the Equated Monthly Instalment (EMI) calculation to figure out how much money you will need to repay each month. This helps in making your new personal budgets to cope with your new payment. It is a complex formula to calculate on paper so use an app like Loan Calculator to help you calculate your repayment quickly and accurately.
Step 1: Tap the Lock icon next to what you want to find out. For the screenshot above, we are trying to find out the monthly payment.
Step 2: Put in the total loan amount
Step 3: Put in the interest rate that bank will charge you
Step 4: Put in the Loan term. You can choose how many months or years that you will take to repay the amount
Step 5: Select a monthly payment or a yearly payment. The calculator will automatically calculate how much you have to pay for each repayment
Switch around the loan amount and the loan term to see how much more or less you would have to pay monthly. If the loan amount seems too high, try considering if there are alternatives that are less expensive so that you can take a lower loan amount. If you’re considering a floating interest rate for your loan, try out a higher interest rate to see if you can afford to pay off the resulting repayment amount.
The amortization table even helps you to understand how much interest and principal are paid for in each repayment and is a great tool to help you visualize the future expenditures and savings that you can manage in addition to your loan repayments.
Translated into 35 languages, almost anyone from anywhere in the world can benefit from this smart tool to plan future finances.
Follow Through With The Payment Plan
Be proactive in making timely payments to avoid penalty payments and late fees. You can set up automatic payments through most major bank accounts (if your bank supports Telegraphic Transfer, you should be able to set it up) to prevent forgotten payments. Alternatively, use Expense IQ or similar apps to set reminders to make payments.
Track your expenditure by recording each purchase and payment immediately in Expense IQ. Manage your budget by referring to the detailed reports to check for any unnecessary spending patterns. You want to shave off your loan as much as you can within your abilities. The extra savings can go into the emergency fund to prepare for the times in need. Be alert in your expenditures and payment periods to avoid additional payments adding on to your debt and further tightening your budget.
With adequate consideration and planning, a loan can be a great way to finance your expenses, as long as you have reasonable loan terms and conditions adjusted to within your own means and abilities. You can get Loan Calculator and Expense IQ for free from the Play Store.
This article is supported by the team behind Loan Calculator, who believe that nobody should end up in uncontrollable debts, avoidable with careful planning and smart use of tools. Loan Calculator is created with helping anybody considering loans in mind.
Loan Calculator: Free App on Google Play Store
This article is contributed to by our guest writer Lay Peng. Thank you Lay Peng! If you would like to contribute an article to our blog, contact us through any of our communication channels!