Keeping Your Loan Repayment in Perspective

A loan can allow you to obtain something that you might have never been able to afford otherwise. In this way, loans are incredibly useful tools that allow you to realize your dreams on a timetable that actually makes sense. While loans have plenty of positive qualities, ranging from providing a cash advance during an emergency to giving families the chance to own their own home, it’s important to understand the different loan repayment options before you commit to a loan of any type. Without this knowledge, you could find yourself responsible for a loan that you can’t afford to repay. Here’s what you need to know before you sign on the dotted line.

Term

One variable in loan repayment is the term of that repayment. That is to say, the amount of time that elapses until your loan is paid in full. One way to lower your payment is to stretch the term over a longer period. For example, most types of auto loans typically come in three-year, five-year, and six-year terms, while mortgages are most commonly obtained with 15- or 30-year terms.

To be sure, a longer term will lower your monthly payment in the short-term. However, over time, the amount of interest paid will be much higher, as you are making more payments that include interest, not to mention that longer loans typically have higher interest rates. Therefore, it’s important to choose the shortest term in which you can still afford the monthly payments. That way, you are able to pay off the loan sooner, and you end up paying less, overall, for the item you obtained.

Interest Rate

Another big variable in loan repayment is the interest rate. As mentioned, the term you select for your loan will have a big impact on the amount of interest you pay over the lifetime of the loan. One way to change your interest rate is to select between either a variable or fixed interest rate. Variable interest rates typically start quite low, meaning you’ll be saving a lot of money on interest, even if you’ve selected a longer term.

However, this variable rate can change at any time, meaning it could increase to a rate that you can’t afford. On the other hand, a fixed rate will typically start out higher than a variable rate, but it will remain the same for the entire duration of the loan. This typically makes it easier to budget for your monthly loan payment, since you always know exactly how much interest you’re paying.

Down Payment

Ultimately, of course, you take out a loan simply because you don’t have enough money saved to buy a high-dollar item. At the same time, it’s a good idea to have some money saved to use toward a down payment on the loan. A high down payment will allow you to have a lower monthly payment as there’s less principle to pay off. In addition, a higher down payment will often help you obtain lower interest rates on your loan, meaning you’ll pay less in the long run.

Of course, a lower down payment can have its advantages, as well, since you don’t have to save as long until you get enough money together for a down payment. This means that you can obtain the item sooner, which, especially in the case of a home loan, could make the difference between snagging the home you want and one you just have to settle for.

Expert Advice

In the end, your individual situation will be unique from every other person’s, as you have a unique financial history that will determine what loan products and interest rates you’re eligible for. Once those are determined, however, it’s important to understand these other factors so you can obtain the products you’ve always wanted for the absolute best price.

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