Recently, I played host to a few friends at my home. One topic that quickly took up most of our conversation time was the advantages, and of course, disadvantages of having so many downloadable loan application softwares floating around the ether.
During this chat, I revealed how I had to access a personal loan from one of them and though the interest rate was, in my opinion, unreasonably high, the instant I announced I had paid it off easily enough, one of my friends seemed surprised and commented with a near pitch high exclamation, “how were you able to pull it off so easily?”
I asked him, “Pull what off? Taking the loan or paying it?”, he replied to the latter of course, to which I gave him a confused stare. He went on to complain about how he was so indebted to two Apps, family and friends, that he could neither go to one or the other anymore for a credit line to upset any loan outside his usual paycheck, particularly from one of the Apps that had already begun to inflict penalties for overdue payment.
This was really confusing for me and my other friends, as we had always previously presumed this one friend of ours was not only quite well-to-do but had a greater, and more consistent, income stream than the rest of us. Further investigations into why he was having such difficulty repaying not just one, but multiple loans, gave clearer insight into what his challenges were. And though some may consider this a trivial topic, it is important to note that like my friend, many are struggling under the pressure of loan repayments and may need some of the advice this article may have to offer. So, without necessarily divulging my friend’s private matters, we will seriously consider personal loans, and of greater importance, how to easily have them paid off.
Loan App or otherwise, we have all had one need or the other, requiring a quick financial fix, and in more cases, than one has had to access a credit facility of some kind, regardless of the source. To be clear, there is no crime or shame in taking a loan or accessing a personal credit facility, the challenge almost always has to do, with not the interest rate or its tenure, but how we utilize the loan and the actual repayment itself.
Now, from a purely business standpoint, and if you are even a little conversant with how accounting works, you should understand that the instant you accept a loan, personal or otherwise, that facility goes into someone else’s books as an asset since you are now indebted to that institution or person for not just the loan but the interest to be incurred on it. Likewise, that loan goes into your own books as a liability no matter how well-intentioned your use of the funds is, and for much the same reason.
Liabilities are always a pain, and it is best to get rid of them as quickly as possible to avoid incurring further liabilities, mostly in the form of penalties or worse, seizures. One good reason is that they hinder us from achieving other, sometimes, more important goals, and on a more psychological level, it just helps you sleep better at night. So, here are some strategies to think about when considering repayment plans that could help you offset your personal loans faster.
Do you really need to take that loan to begin with?
Though a slight deviation from the actual topic, this should be the very first step to accessing a personal loan. Asking yourself the all-important question if, for starters, you really need to take it. Having a savings or easily liquidate–able assets very quickly answers this question. Manifestly, the more cash you can put away for a rainy day, and resist the temptation to pilfer ever so often, particularly on inessentials, the more of it, if not more, you will have when you really need it. Thus, you must learn to adopt a strict savings culture and even if you earn a salary today, ask yourself one critical question before accessing a loan, ‘Say I lose my job tomorrow, do I have enough stashed away to repay my debt, and over the agreed period?’. If the answer is ‘yes’, then by all means go ahead, however, should the answer be ‘no’, then hope is not a strategy you should rely on to repay your debt(s).
Time for a lifestyle change
It’s easy to think that should your answer to the above question about easily being able to repay your loan means business as usual then think again. Murphy’s Law states, ‘If anything can go wrong, it will…’, and as another common saying goes, ‘even the best-laid plans sometimes run amok’. Accessing a loan means you must discipline yourself enough to understand that until the debt is paid, you must keep luxury expenses at bay. Even if you take a personal loan for a luxury holiday, the instant you answer positively to if you can pay the loan back should things go wrong, you must immediately seek to wipe that liability off your books by cutting back on any other excesses, yes, even the cable, Netflix subscription, and eating out, until the current debt is paid, and in full.
That way, not only will you have more confidence in your eligibility to access another loan, but should the need arise, your creditors will also be willing extend you another line.
Try to pay more than the minimum installments, and regularly
Before accessing a loan, always be sure to check if you get breaks or some bonus for early payment. While some lenders charge penalties for early payments because of the fees in interest payments they stand to lose from no longer having your loan as an asset in their books, most of them more than welcome it and even offer rewards for such. So, should, for example, your loan have a repayment period of 30 days, rather than wait till the very last day and minute to pay back, break it down into blocks of 4weeks and allocate a minimum payable amount to a particular day of each week then add a little something on top of that. That way on the day of the last week, you pay a lesser sum than the previous weeks. The same strategy can also apply should you be indebted to an individual even without an incurred interest rate attached to the credit terms.
Look for ways to make an extra income
Let’s face it, the major reason you had to access a loan in the first place was that your current income simply did not meet up to your financial requirement at that time. Should you be the type who doesn’t like being restricted particularly on what and how you spend money then perhaps it’s time to grow your income stream by a pipeline or two. Several articles on this site have been exhaustive on this topic, so we will move on…
Do not use one loan to pay off the other
Tempting as the idea might seem at first, in more cases than one, taking a loan, interest-free or not, to pay off another, simply leads to interring yourself in even more debt and more headaches than you had originally found yourself in. In certain extraneous cases, this may be an acceptable step to take, but do not make it a habit, remember, ‘even the best-laid plans…’
Consider the ‘Snowball’ method of debt repayment
This is a great tactic should you have more than one loan to pay off. This typically involves starting with your smallest loan first, paying that off and then rolling that same payment schedule towards the next loan and then working your way up to the largest. This method can help you build momentum as each balance is paid off and eventually, once you are debt free, you can finally start saving.
In contrast, you may give the ‘Avalanche’ method a go
The Avalanche method focuses on paying the largest loan, particularly with the highest interest rate first. Similar to the Snowball method, when the higher-interest debt is paid off, you put that same money toward the next high-interest rate loan and so on until you are done. By focusing on the loans that are the most expensive to carry, in the long run, would effectively mean you should pay less over time and eventually have more to call your own.
Refinance your loan if you must
Should it become clear that you may not still be able to meet the deadline on your loan then perhaps it is time to discuss refinancing terms with your creditor and request an extended payback tenure. Be warned, however, despite the extended period, refinancing carries heavy interest charges as well.
Restructure your debt if you must
Unlike refinancing which simply offers you an extended payback period on your loan, not only helps you negotiate an extension but also a lower interest rate. Be warned that this is however only accepted by creditors, in more cases than one when it has become clear that insolvency is imminent, in such cases as you have lost your job or other scenarios. Creditors will allow you time to get your affairs in order, but for only a slightly extended timeframe and reduce the previously agreed interest rate only when they must.
Let go of old cargo
We sometimes have things or objects of some value that have been laying around our homes or office for some time and to no apparent use. Auctioning off these old items is also an excellent strategy for raising enough cash to offset your debt without necessarily having to rely on payday to come to your rescue. Plus, it’s a good way of de-cluttering your environment while at it.
There have been several laudable initiatives by regulators and financial institutions towards promoting inclusion in our financial ecosystem, like digitizing access to credit facilities. In a way, this is a good thing as it increases our awareness on loans and other financial matters. However, over and above everything else, responsible borrowing needs to be ingrained in borrowers to help them build a healthy credit score and a balanced life, not be overly dependent on borrowing.
Borrowing, particularly from the now popular online creditor Apps, does certainly help you meet certain extraneous short–term priorities even though your current financial status may not be up to it, but this also means properly evaluating your need and repayment capacity, even before taking the loan, and then adhering to the above simple practices to help you stay on schedule when it comes down to offsetting your loans without people knocking on your door or calling up friends and loved ones to report your credit default.
Brain Essien is a business consultant, with expertise in digital marketing, crowd funding, pitch decks and business plan/proposal formulation and design.