Loans, when used correctly, can help you improve your personal – and business – finances. Productive loans lead to more revenue, and this revenue will further expand your personal financial reach. At that point, you have the option to invest more, save more, and use loans in a smart and productive way.
On the other hand, loans can also get out of hand, especially if you don’t manage the loans you use carefully. Badly-managed loans and personal finances could as easily lead to worse financial problems. Keeping your loans manageable is a must, and these five top tips will help you do just that without any hassle.
1. Watch Your Ratios
Saving 10% of your income is a good starting point; do it as soon as you receive the income and not after you use it for expenses, so you can be consistent with saving that portion of the income.
A maximum of 30% of the income can be allocated for repaying loans. The rest is for monthly expenses and other needs. With ratios like this, keeping your personal finance in check is a lot easier. When you fail to keep these ratios, things can get out of hand.
If your monthly repayment amounts add up to more than 30% of your income, you have more loans than you can afford. This could lead to serious issues in the future, including an inability to pay your debts on time or defaulting on them entirely.
Before you take out another loan, check if your loan repayment to income ratio is above 30%. if it is, avoid taking out a new loan and work towards reducing your loans – or boosting your income – first. This is how you keep your personal financial future safe from potential issues.
2. Limit the Quantity
Even when the repayment amount is below 30% of your income, it is still necessary to watch the number of loans you have to repay. Too many of them, and you can still run into issues such as forgetting about due dates and not having enough money to pay the loans on time.
Too many loans could put your cash flow under serious pressure. When you have more than four credit cards, for example, it is not always easy to keep up with the payment schedules. After a while, you may end up paying more in late charges and other administrative fees.
Consolidating your loans is a handy solution to consider in this case. Debt consolidation can help combine multiple (usually unsecured) debts into one that is much easier to manage. You gain a number of benefits from consolidating the loans too.
For starters, you can negotiate a better interest rate than existing loans. This means you can save a lot while still repaying the loans in a more manageable way. You can also negotiate better settlements for the existing loans to further reduce the amount you need to pay.
3. Choose Your Lenders
Responsible and reliable lenders will work with you rather than against you. Lenders who are serious about helping their customers will provide so much more than just the loan itself. For example, you can learn how to use the loan for more productive purposes with the help of a financial planner from your lender.
When you do run into issues with repaying the loans, good lenders will also work with you in coming up with a more reasonable repayment plan. They will even help you consolidate your loans if that is the best possible option.
There is a simple reason behind this approach: lenders want their loans repaid so that they can keep their Non-Performing Loan (NPL) ratio at a minimum. That is why you should always consult the lender before and while using the loan for various reasons.
Choosing a lender is fairly easy, especially now that you have more options to choose from. Take into account factors such as testimonials from past clients, the lenders’ terms and conditions, and the loan deals they have in store before deciding to apply for the loan that suits you best.
4. Find Ways to Save
Speaking of comparing lenders, it is also a good idea to compare loans before taking one out for personal use. You’ll be surprised by how much better the quotes are when you actively compare loans from multiple lenders. You can even mention the fact that you are comparing lenders to land additional discounts.
Asking for a discount is not a bad idea. According to multiple studies, simply asking for a lower interest rate before applying for a loan helps lower the interest rate you are quoted by an average of 1%. It may not seem like much, but that 1% can turn into a total of more than $1,000, depending on the loan.
The type of loan you use matters too. Unsecured loans tend to be more expensive than secured ones. The same can be said for loans you get when you have a bad credit score (as opposed to the ones you acquire when your credit history is stellar).
These differences – the small amounts of money you can save – are worth pursuing. Rather than applying for a loan immediately, try improving your credit score and negotiating a better deal on the loan itself.
5. Optimize Your Personal Finance
When you have loans to repay, repaying those loans should always be your priority. Start taking serious steps towards eliminating unnecessary expenses so you can allocate more money towards repaying your loans.
Again, no amount is too small to save. Saving $2 on coffee every day means having an extra $60 to allocate towards repaying your credit card bills. The same can be said for other small expenses, including paying for unused subscriptions and buying food items that you don’t really eat.
The more you optimize your personal finance, the better you will be at managing your loans. Combined, these five tips will help you keep your loans manageable in different situations. Repaying the loans is just a matter of allocating a portion of your income consistently.
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