Managing your Loan
Once you have committed to a loan, in order to successfully manage your repayments and to ensure that you do not come unstuck at a later date, it is important to plan and readjust your finances accordingly. There are a surprisingly large number of borrowers, who struggle to balance the repayments of their loan due to poor execution of some of the more basic financial management skills. This guide highlights some of the common areas in which these types of pitfalls can occur.
Effective Budgeting
The only way to ensure that you do not miss a repayment when it is due is to ensure that the required funds will definitely be available as and when they are required. By far and away, the best way to do this is by setting strict financial boundaries in the form of a personal budget. Below we have provided a step-to-step guide to help start you off. You will also require the following items: -
- Notepad and Pen
- Wage Slips
- Copies of all monthly bills and statements (to determine your outgoings)
Step 1 - Know your income
Before you can begin to plan your budget, you will firstly need to know how much
money you have got to work with. Regardless as to how and when you are paid, we would recommend setting your budget on a monthly basis, opposed to weekly or bi-weekly. The reason for doing this is simply due to the fact that most people's financial commitments are payable on a set day within the month, if you choose to pay your bills by direct debit it is also likely that you will have arranged for all of your payments to be made in and around a set date. Make a note of your net monthly income (earnings after tax), but try not to include any overtime, commissions or any other form of non-guaranteed bonuses.
Step 2 - Know your outgoings
Once you have made a note of your net income (earnings after tax), you will then need to make a note of all of your monthly outgoings. In a high number cases, the primary reason for individuals to default on their loan repayments can be rooted to an error or miscalculation of their monthly commitments. If you are setting a budget, it is absolutely vital to ensure the accuracy of this figure, as all other variables associated to your budget are reliant on it being exact. We would advise gathering all of your monthly bills together as a means to determine this figure. These are likely to include some or all of the following: -
- Utilities - Gas, Water and Electric
- Mobile phone or House phone (Or both)
- Rent or Mortgage payments
- Any Insurance payments - Home, Life, Car ECT
Once you have a copy of these bills you will then need to tally up your monthly outgoings and make a note of this figure. If you expect certain commitments to fluctuate such as a mobile phone bill, it may only be possible to include an average payment (We would suggest taking an average from the last 3 bills that you have received).
Daily Outgoings
Once you have determined a figure for your fixed outgoings, you will then need to determine a figure for the total costs associated to the running of your day-to-day life. Typical examples of these of commitments will include: -
- Food bills (Either weekly or bi-weekly
- Travel expenses - To include car petrol, train tickets, taxi fares and bus journeys
- Recreational - Socialising, Gym membership, clubs and societies
- Clothing - Work and recreational
It is highly likely that the amount spent on any or all of the above are subject to change, however, certain variables (such as food and travel) will almost always be the same, week in, and week out. The key to budgeting for the introduction of a new financial commitment is to control (or limit) spending on non-essential commitments such as recreational or possibly even clothing. Once you have determined a figure for all of the above, we would advise doing the following: -
Split your outgoings into two sections marked Bills and Daily Outgoings listing the total sum for both sections on a per month basis e.g. Bills - £540 per month, Daily Outgoings £530 per month.
List the individual amounts spent on each variable within each section e.g.
Once you have ascertained as to how much you are committed to spending each month, you can then determine as to how much you will have left over to manage the payment of your loan (net disposable income). The calculation you will need to perform in order to determine this amount is as follows: -
- Net Income per month (Income after tax) - Total Outgoings = Net Disposable Income
OR
- £1500 (Net Income) - £1070 (Total Outgoings) = £430 (Net Disposable Income)
In the example above, the prospective loan applicant will have £430 per month available to manage his or her loan repayments. However, in order to keep the budget super tight, it is also good practice to set a buffer zone for which to account for any variable, which has the potential to fluctuate such as Food, Phone and Travel.
Setting Buffer Zones
The most effective and successful budgeters will almost always include a buffer zone as part of their financial planning. In essence, a buffer zone is a set amount of money that is put aside each and every month, which can be called upon in the event of an unexpected eventuality. Most people with allocate these funds to a separate savings account, and will usually set up a direct debit or standing order mandate from their current account, for a fixed amount to be transferred across to their savings account, on a specific date within the month. Having a buffer zone in place ensures that an individual will not come unstuck, should they receive a bill that is atypically larger than normal.
Avoiding over-commitment
Once you have drawn up your personal budget, you will then have an exact understanding as to what you can comfortably afford to repay, when applying for your loan. The best advice you can receive when comparing loan quotes, is that by absolutely no means should you accept any offer, should you be in any doubt with regards to your ability to meet the repayments. Over commitment is extremely common amongst UK loan borrowers, however, it is also easily avoidable so long as you know where your stretching point is, and to ultimately stay well away from it.
Conclusion
Although some or even all of the above information may appear to be touching on the obvious, there are actually very few people, who put any of the above principles into practice. Recent studies suggest that over 70% of UK borrowers will struggle to manage certain aspects of their personal finances, due to lack of practical financial management knowledge. Having a personal budget in place is not necessarily fool proof, but it will certainly help reduce the chance of loan repayment complications.
