Credit Repayment

A Look at Credit Repayment Scenarios

B y its very nature, credit is a temporary entity. Regardless of the amount of the loan (short-term in the form of a credit card or long-term as is seen in a mortgage), you will eventually be required to pay back the initial amount owed. Interest will also be attached to these payments, so it is important to appreciate how typical credit repayment schemes function as well as to appreciate what pitfalls to avoid along the way.

Repaying a Loan: Where to Begin

Before you ever begin to contemplate requesting a loan it is critical to determine whether or not you can make the required payments once the program comes to maturity. This is the biggest mistake that countless applicants make; particularly those who are requesting a loan for the first time (such as college students).

The other major concern is what the loan is intended to be used for. Some applicants request this vehicle in order to purchase items that might not be entirely necessary (such as an expensive luxury vehicle or a boat). Although the short-term gratification might seem worth the investment, the fact of the matter is that the long-term repercussions can cause grave consequences from a financial point of view.

Assuming that the reasons for the personal loan are valid, the next step is to take into account the time that you have to repay the principal. All reputable providers will make this window clear from the very beginning, so there should be few surprises to encounter along the way. Still, always read the “fine print” found within the terms and conditions. Keep an eye out for any confusing phrases and be certain that these are clarified before signing the proverbial dotted line. Remember that your future liquidity and your personal credit score will depend entirely upon the ability to make the required payments within the applicable time frame.

Taking Interest Into Account

A loan can be segmented into two discrete portions:

  • The principal (the amount requested)

  • The interest

Knowing the associated interest payments is another important metric that should never be taken lightly. You will be required to pay a certain amount of interest every month for the entire lifespan of the loan, so such small increments can quickly add up. It is also important to mention that those who possess poor credit scores will often be required to pay higher interest rates (due to the increased risk of late payments or defaulting). If you cannot afford to repay the interest along with the initial balance, it is best to speak to a different lender.

Knowing Monthly Repayment Plans

All personal loans are associated with some type of repayment period. In the majority of cases, you will be required to make payments (installments) on a monthly basis for the duration of the loan. The first payment generally begins once the lender has approved the transaction. In certain instances, you might be required to make a down payment (such as when taking a loan out for a vehicle). Take a look at the total number of months which are required to settle the loan. Then compare this figure with the possibility of meeting such obligations. If there is any doubt that you will be able to satisfy the requirements of the lender, it is wise to take a step back and consider your options.

The Penalties Associated with Late Payments

Late personal loan payments are your worst enemy. Lenders will frown upon such habits and they will often result in higher interest rates. In turn, this can make it even more difficult to meet future obligations. A vicious cycle is often the end result; further harming your credit rating. You therefore need to be responsible with your spending habits and if you are ever in doubt, speak with the institution in order to determine if it possible to enjoy a temporary “grace” period.

What if You Default?

This is always the worst-case scenario. Defaulting on a personal loan will make it virtually impossible to apply for a similar package in the foreseeable future. Should you fail to make the necessary payments, it is more than likely that your credit score will suffer as a result. There are even instances when debt collection agencies could become involved.

Repaying any type of loan is always a critical concern and by appreciating the issues mentioned above, you will be able to avert any unforeseen circumstances. Please feel free to refer back to this article as a guide or simply as a means to understand your options.