It’s important to make sure that you can figure out the full cost of whatever loan or credit you attempt to take out – including interest payments. In other words, you need to be aware not only of the amount you’re borrowing, or how much you feel comfortable paying on a monthly basis. Taking the time to work out the costs of borrowing money will help you to plan your finances and make sure that you can really afford the loan that you have decided to take out.
Here we’re going to look at what goes into working out a loan repayment plan, and the important elements to be aware of.
The Elements that Affect Borrowing Costs
How much money you will pay when you are trying to borrow money will depend on how much you need and how quickly you are going to repay the amount that you owe. For instance, if you only want to borrow a very small amount of money and repay that money very quickly at a low interest rate, then you might not pay very much interest at all. In credit cards that allow for 0% interest on initial purchases, you may not pay any interest at all. Alternatively, if you want to borrow a large amount of money over a long period of time with a high interest rate, this will cost you more.
The best option is often to look at the APR when you are comparing products. The lower your APR is, the better, but you should also look at how much the loan is going to cost overall. This amount will usually be bigger for long-term loans even if your APR is less.
Flexible and Regular Payments
A loan agreement will come equipped with an amount that you need to pay back each month. The loan that you take out may also charge an early repayment fee if you clear the amount you owe ahead of time. Repaying your loan too early however could be a good way of minimising long term costs if there aren’t any penalties.
Other types of borrowing will not need you to make the same amount of repayments every month. For example, if you borrow money through your overdraft or a credit card, then you may be able to determine exactly how much you pay back each month per your needs and the bills that you have to pay. In this case, there may even be no minimum repayment. However, it is important to note that the interest rates on these options can be higher, and some overdrafts will charge an initial arrangement fee too.
Pros and Cons of Regular Payments
There are many benefits to considering regular payments as a way of paying off your debt. Most people find that having to pay the same amount every month helps them to manage their budget more efficiently, and you will also be able to figure out exactly when you will be finished making repayments. At the same time, if you make regular payments you will often be able to pay back the amount you owe early without having to pay a penalty. The only rule is that you will need to overpay by less than £8,000 in a year.
The only really negative aspect of regular payments is that having to pay the same amount each month might be difficult if you currently have a fluctuating income or you’re unsure of what you’re going to earn each month.
The Costs of Borrowing Money
It is sometimes possible to figure out exactly how much money it is going to cost you to take out a loan or credit card with the information that lenders give you. By law, you must find out the interest rate and the fees or charges, as well as the APR. You will also need to find out how much you’ll have to repay in total, and how much you should be expected to pay each month.
Remember that you should be able to find this information on the website of the credit or loan company, and it will also be located in the pre-contract agreement that you signed for credit. No matter the circumstances, the most important thing to remember is that you need to make sure you can make repayments regularly and on time. If you miss repayments then you might have to pay additional charges, and it could also harm your existing rating for credit because lenders often evaluate how you have managed your credit in the past when determining whether they should lend you money.
Make sure that your bank account always has enough money in it each month to cover repayments, and set up a standing order if you need to make sure that payments are not missed.