Taking out a loan can sometimes be necessary to run a household. You might have relied on a short term loan like an installment loan to help cover an unexpected emergency expense or repair. This could be something like an unexpected trip to the emergency room, or a flat tire that’s going to stop you from getting to work.
That being said, taking out short term loans online may still be a major decision. Regardless of why you need it or how often you use one, a well-made budget should be able to account for these loan payments.
To make sure you that you are well-informed about the do and don’ts of paying off a loan, check in with this guide.
Understand Your Terms and Conditions
Whether you’re borrowing to help with emergency medical bills or with unexpected household repairs, every loan starts with the same document: an agreement. And this is something you should review before you even apply for a loan in the first place.
A loan agreement is a formal, binding contract that includes your rights and obligations as a borrower.
These responsibilities may vary depending on your lender and loan type.
Generally, they go over important information such as:
- How long it will take to pay off the loan
- Individual due dates of scheduled payments
- Amount of each payment
- Interest rate
- Minimum payment policies
- Late payment penalties
Although the exact details may vary, every contract shares one common goal. Its purpose is to define what the borrower and the lender agree to do. As a result, it is essential to read your terms and conditions and any other information mentioned in the loan agreement before you accept a loan.
Make sure to only sign a document when you understand it fully. It’s always a good idea to ask the lender for any clarifications. This can help you understand if the product that you are borrowing is something you can afford.
One of the benefits of working with a direct lender like us is that we keep all of your loan’s terms and conditions as simple as possible so that they are easier to understand.
The Dos of How to Pay off a Loan
Think of it as a Non-Discretionary Expense
When it comes to your budget, you can split most of your expenses into two categories: discretionary and non-discretionary expenses.
- Discretionary expenses: They’re often the fun things in your budget that you can do without. Think of them as your wants — like takeout and entertainment.
- Non-discretionary expenses: These are the essential items and services in your budget that could be hard to cut out. They make up your needs that you pay first, like rent, utilities, and groceries.
Payments on an online cash advance will likely fall into the second category because it is debt you owe. Skipping takeout saves you money, while missing a bill may cost you more, along with significant consequences including added interest, late fees, and potential damage to your credit.
Framing your loan payments as a non-discretionary expense reminds you to prioritize these payments over the ‘wants’ in your budget.
Update Your Budget
Juggling your loan with other bills may be a challenge, even if you find a cash loan with affordable rates and flexible terms. Here, it’s not the size of your installment loan that makes your job tricky; it’s the fact that you have to manage all these things at the same time.
If you’re struggling to manage everything at once, check your budget over for non-essential spending or discretionary expenses. If you’re able to cut out these bad habits, you may be able to free up more cash for your repayments.
Not sure what your bad habits might be? Everyone’s budget looks different, but some of these non-essentials may include:
- Streaming subscriptions
- Non-essential beauty products
- Concert, movie, and theater tickets
- Unnecessary clothes and shoes
You may be able to free up enough cash by eliminating just one of these expenses from your budget. Or, you may have to cut down on a few. Do what it takes to relieve some of the pressure of your finances by updating your budget accordingly and make sure to live within your means.
Make Additional Payments
Cinching your budget tight may come in handy, even if you end up freeing more cash than you need for your monthly payments or minimum payment. If you use this extra cash to make additional payments, you may be able to pay off your loans faster.
It depends on whether your lender applies these payments to your principal or interest. If they go towards your principal, you may deliver a one-two punch to your loan.
- You may lower what you owe.
- You may reduce the amount you’ll pay interest on.
But before you figure out how to pay off a loan with extra payments, make sure there aren’t any penalties.
Believe it or not, some lenders may apply a fee, but not here at MoneyKey. We don’t penalize our customers for making early or additional payments.
This is why it’s so important to read your terms and conditions carefully, so you’ll know if there is a charge.
How Long Will It Take to Pay off a Loan?
Usually, you can look at your terms to find out this information, but your timeline may change if you make additional payments.
For example, to find out when you’ll make the final payment on a closed-end installment loan, contact your lender. They’ll let you know how your additional payments have altered your timeline.
Think about Building Your Financial Safety Net
Eventually, pinching pennies may pay off. The day of your last payment will come, and you’ll finally get to strike this debt from your record.
You’ll also get to remove it from your budget, freeing up cash that would normally go towards repayments.
Funneling this money back into your budget is one option. You can use some of this cash to celebrate your achievement.
Another option is using this money to establish a financial safety net.
A financial safety net, or an emergency fund, consists of short-term savings you can tap into at a moment’s notice, as soon as things go sideways.
The Don’ts of How to Pay off a Loan
Now that you know what habits may help you manage your loan better, let’s move onto the habits you never want to make. Here are the five don’ts of how to pay off a loan.
Ignore Other Responsibilities
When you borrow money online, there’s no way to hit pause on your daily responsibilities. Life continues as normal, meaning you’ll still have to pay rent, utilities, and other bills on top of your installment loan or line of credit.
Although your cash loan is a priority, it’s likely not your only concern. Managing your money like a pro means you’ll have to multi-task.
Remember to spread your attention between each bill, so you don’t fall behind on other responsibilities while repaying your loan. This is a good rule of thumb even if you end up using these alternative options in an emergency.
Pay Only the Minimum Payment
As the lowest amount of money you may pay to avoid penalties, a minimum payment is usually just a fraction of your total balance.
A smaller payment comes in handy when money is tight. It’s a convenient way to put your full payment on hold until you have enough cash to pay it.
For example, let’s say you break your only pair of glasses. It happens a week before your statement is due and two weeks before your next paycheck. As it stands, you only have enough money to buy a replacement or pay off your full balance — not both.
With one option leaving you blind and the other involving paying late fees and potentially damaging your credit, this isn’t an easy choice to make.
A minimum payment gives you a third option: paying a small fraction of your balance. By covering this minimum payment, you’ll avoid late fees and you may have enough cash left over to replace your glasses.
Meanwhile, your remaining balance will carry over to the next month, giving you more time to pay it off in full.
Why it Pays to Pay More Than the Minimum
There’s a chance that you’ve relied on the minimum payment before. It’s an attractive idea. Who would want to pay any more than they have to?
But here’s the thing. By paying just the minimum and carrying over a balance often, you are paying more than you have to and it’s all thanks to interest.
Anytime you carry over a balance, interest accrues on what you owe. The more you carry over, the more interest you’ll accrue.
You’ll also make a smaller dent in your debt, which means it may hang around for longer. A minimum payment calculator shows you just how long will it take to pay off a loan using only the minimum.
Relying on this method once or twice when you’re in a tight spot may be convenient. Nevertheless, it can drastically increase how much you owe if you make a habit of only ever paying just the minimum payment. If possible, always pay down your balance to zero, and if it’s not, pay as much as you can afford.
Use a Loan to Pay off Another Loan
When a looming due date is breathing down your neck — and you have no way of paying it — you may be tempted to take out another loan to pay off the first one in time.
This payment technique doesn’t address your debt in a meaningful way. It only moves money around.
More specifically, you’ll also transfer your debt to another lender that may have different terms and conditions. It could be easy to confuse the terms from the new loan with the old one and miss a due date by mistake.
Max out Credit Cards
Let’s look at an example of a common type of credit – credit cards. When it comes to managing them, why shouldn’t you use all your well-earned credit limit? While it may be tempting to put everything on credit, no good comes from maxing out your cards. It may be a dangerous habit for your finances.
For one thing, it’s easy to swipe your credit card without really thinking about how you’ll pay for your purchase, and you might spend money you don’t have.
What that leaves you with is a big bill you may not be able to pay all at once. Even if you can cover the minimum payment, remember how this feature shares a relationship with your overall balance. The higher your balance is, the larger your minimum payment will be, too.
The balance that carries over will accumulate interest, so you’ll end up owing more. Meanwhile, you’ll have less of your limit available in an emergency — leaving you more vulnerable to unexpected expenses.
Carrying over a balance may also have consequences for your credit depending on your lender. Your balance may affect your credit utilization ratio, which is one factor that informs your credit score.
Your ratio shows what percentage of your overall limit you use. Generally, you want your utilization ratio to be as low as possible, although hovering around 30 percent is acceptable. Once you pass this threshold, however, you may see an impact on your score.
Find What Works Best for You
When it comes to borrowing money, every loan is different. Terms and conditions affect what you’re expected to pay and when. Don’t forget how your financial situation may play a part in these things, too.
The result? A borrowing experience that’s incredibly personal. And as a side-effect, your repayment experience may be just as personal, too.
This is something you need to remember whenever you’re ready to pay off your installment loan or line of credit. While we can list broad dos and don’ts that may help you prepare for the task ahead, we can’t point out the best possible way to tackle your debt.
Only you are responsible for determining how to pay off a loan in a way that fits your finances.
If you aren’t sure where to start, our resource center is here to help. You may check these out before you figure how you should manage your loan.