Loans can be a sensible choice

At the moment we have one home improvements loan which we are paying back.  The loan was to make several alterations to our home such as converting a garage into an en-suite bedroom, installing a downstairs WC, adding a porch, new front doors and windows.

It would have taken us a decade to save up for these improvements, so we decided to take out a loan to pay for them.  These improvements are also an investment as they have increased the value of our home, converting it into a four bed home with three bathrooms, whereas it used to be a three bed with one.

Many people get worried at the thought of taking out a loan, but it can sometimes be a sensible choice to improve your home or to condense several debt repayments into one affordable repayment.

For us, in our current situation, we can easily afford the repayments and we are overpaying the loan each month to reduce the monthly income and receive a rebate for as much interest as possible!

We did this previously with a home improvement loan around seven years ago and it worked well for us.

As with all types of borrowing you need to make sure you can afford the repayments and you have a legitimate reason for borrowing the money.

How to manage your loan repayments

So, if like us, you have taken out a loan, you are then faced with potentially several years of repayments.  Here are some tips to help you manage your loan repayments successfully:

1. Only borrow what you can afford

Firstly, only ever borrow what you can afford to repay.  Loans are a big commitment and a type of credit that many people take out so they can spread the cost over several years.  This means you have to commit to paying back the loan on a monthly basis until it’s repaid.

Make sure you assess your existing incomings and outgoings to see what you can realistically afford to pay back.  Consider your financial stability and whether your job role is safe.  Could you afford the repayments if you had to earn less?  If you are self-employed and your income fluctuates then can you afford the repayments on your quieter months? 

Use an online loan repayment calculator to see how much you might be able to borrow and to also see the repayments for different loan amounts over different terms.

The most obvious way to manage loan repayments is to make sure they are manageable!

If you already have a loan and the repayments are a little on the high side for you or you are struggling to pay them, talk to your loan provider.  You may be able to extend the loan term and reduce the monthly payments. 

Never struggle in silence with your debt.  Make sure you seek advice if your debt is causing issues and speak to your lender.  There could be a simple solution just waiting at the end of a phone call.

"If you have equity in other assets such as property, it can sometimes make sense to free up capital which can be reinvested into other income-generating activities," comments James Durr of property asset / business auction house Property Solvers.

2. Budget for your loan repayments like any other bill

Treat your loan repayments like any other household bill you have each month.  They are a necessity and need to be included in your bill outgoings each month, before you are left with your spending/saving money.

Set up a direct debit so you never miss or forget a loan repayment.  If all your bills go out on a certain date, like the first of the month, ask your loan provider if they can match this date if it’s on a different date.  This will make budgeting and paying bills more straightforward each month.

Failing to make a loan repayment can negatively impact your credit score and may result in fees/charges being added to your loan balance, increasing your debt and reducing the likelihood of you being accepted for another loan in the future.

3. Contact your lender if you can’t make a repayment

Never just skip a loan repayment!  It will be marked as a missed payment and can have severe consequences.

Missed payments will show on your credit record and negatively affect your credit score.  This can affect your future chances of borrowing money when you need a credit card, loan or mortgage.  Your credit score is sometimes checked for other things like pay monthly phone plans, so it’s important to keep it in check.

If you know you can’t make a repayment then call your lender as soon as possible to explain and for a solution.

They may allow you to take a payment holiday or reduce your monthly repayment until your situation improves.

COVID-19 has been an example of this where people were suddenly unable to work through no fault of their own and required payment holidays on mortgages, credit cards and loans.  Lenders are usually very understanding and will work to a solution with you.

If you agree together that a payment will be missed and officially take a payment holiday then it won’t negatively affect your credit score.

4. Overpay if you can!

Loans aren’t set in stone.  I used to think I could only pay back the loan as agreed, but you can actually overpay loans to clear the balance quicker and reduce the term, or you can opt to reduce the monthly repayment figure with your overpayments.

We were able to pay back our previous home improvements loan several years earlier by overpaying.  We are doing the same with our current loan.  Every month we send an overpayment as a bank transfer using internet banking.  You can find the details on your statement or contact your loan provider to learn how to set up a bank transfer for overpayments.

Some providers do charge an early repayment fee if you are able to repay the whole balance in full, so do check the terms of your loan.  If you think you’ll be able to pay a loan back early then check the terms when you are applying to ensure you choose a flexible loan that offers early repayment without a penalty.  

Final thoughts

Loans can be a great choice for paying for something costly such as home improvements, a new car or a surgery.  However, they are just as important as all your other household bills and the repayments must be budgeted for each month.  If your situation changes and you are unable to make a loan repayment or it’s no longer affordable for you, then call your lender to discuss your options and come to a new arrangement.  Never simply miss a payment!