How to calculate if you can pay your instalments?

Most people are pretty optimistic in calculating how much money they can set aside for their instalments. That optimistic approach can get you into trouble, putting you into more debt than you can handle, so you should adopt a carefully worked out strategy for calculating your credit capabilities. 

Carefully calculate your monthly costs

Sit down with a pen and paper and calculate your average monthly costs. That will be your starting figure. 

Test the calculation

Put the first calculation, the staring figure aside, and write down carefully everything you spend in a month, day by day. After a month of writing every expense down, add it all up and compare that figure to the first calculation that you made. Is there a difference? Usually there will be, and the starting figure will be smaller than the one at the end of the month. The difference will be the measure of your optimism. In most aspects of life, optimism is a good thing, but in taking out loans it can be disastrous.

To be fairly certain that you will be able to pay for your instalments, you need to earn enough to pay for all your daily expenses + your instalments + 10% for emergencies.

Give the loan a “trial period”

Since secured loans need (usually) 10-20% deposits, and are never taken in a day, it might be good idea to make an exercise that would last for a month or two. You should try to increase your bank account balance for the amount of your projected instalments PRIOR to taking out the loan. If you can manage that without difficulty, then you would probably have no problem with your loan payments, and you might even be able to increase your deposit percentage during the time you are researching about your loan or searching for property you want to buy.

Bank rules can be helpful

Luckily, the banks will not allow you to take out loans that you absolutely cannot pay. When you apply for a loan, the bank will carefully examine your credit score, assets that are available to you, your income and probable costs. Still, you should not rely solely on the estimate of the bank. You should rather calculate, and test your calculation yourself.

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What types of secured loans are available and should you consider them at all?

As I already previously mentioned, in order to take out a secured loan you will need a large enough asset that will function as a security, or collateral, for that loan. In most cases the banks mean homeowner secured loans to be exclusively mortgage types of loans, but other versions do exist, although most of the common folk will never get the chance to enjoy the benefits of such a loan. For instance, you can secure loans with any kind of bankable valuables, such as company shares, securities, bonds, jewellery, gold coins, gold bars and similar nonsense. As you can see, most regular people do not own any gold bars, so they will not even consider such a loan in the first place.

There are plenty of homeowners out there, though, and for that reason the mostly encountered secured loan is a homeowner loan. Keep in mind that most homeowners also may have a mortgage on their property, but that mortgage has been paid off to a certain extent, so a homeowner loan can also be a second mortgage, second charge loan or as already mentioned, a secured loan. Most of such loans are being provided by brokers, but some banks do allow customers to apply as well, particularly if you are already a valued customer there.

The homeowner loan is really similar to a mortgage and will also require a promissory note that will function as an encumbrance and be entered into a cadastre or similar land register, prohibiting you from selling your home without the lender’s consent. The biggest advantages of such a loan is the considerably lower APR rate and the long term repayment plan, which allows you to get a larger sum as a loan, without the instalment rate ballooning inappropriately. On the other hand, the long term obligation does not provide much of a wiggle room and if one day something happens unexpectedly, like you lose your job, or the economy dictates that your income gets reduced, or you get in an accident and cannot work anymore, you will most assuredly get into repayment trouble.

For that very reason, lenders often require that the homeowner not only sign a promissory note, but also purchase a hefty insurance package, which includes life insurance, but also includes extended insurances in regards to the home you put up. If you are considering such a loan, this will be another point that you will have to take into consideration, because it is a recurring expense. Some lenders also require the customer to provide re-evaluation certificates, by a state-approved assessor, which need to be obtained periodically. Therefore, make sure that you read the loan agreement carefully and do not skip the parts in small print, because there lie be the most traps hidden, so to speak.

Secured loans, and in which case should I take out one?

A secured loan is a loan for which you put down some asset as collateral. Typical examples of secured loans are mortgage loans, for which you put up a house as collateral for a loan that you use to pay out a house. Of course, you can take mortgages for houses that have previously been paid off, in order to finance something else, like a business venture.The important thing is that you are putting down an asset (typically your home), as an item against which the loan is secured. If you fail to make your payments, the bank can repossess the asset, according to the contract. That is why, if you are willing to take a secured loan, you should be sure to get a loan at much more favourable terms than if you took an unsecured loan.   

             

Typically, the asset that you are securing the loan against is of greater value than the loan itself. The more instalments you pay, the bigger the difference between the two values, the more you stand to lose if the bank repossesses your asset. That does sound quite bad, and it is understandable that people are reluctant to take out secured loans. The notion of the bank taking over a home at some point is quite unpleasant. But bear in mind that the bank usually does not like torepossessassets, it’s an expensive and complicated procedure, so they like to avoid it. The bank always prefers hard cash. For that reason, if you have problems with instalment payments the bank will offer you alternative payment plans rather than taking your property.

Still, why should one take out a secured loan and risk losing their home? The reasons are quite simple. Since the loan is secured, and with an asset larger that the loans worth, the bank looks upon it as a low risk investment, so the conditions are much more favourable for the client: the interest rates are much lower than for the unsecured loans, repayment periods are much longer, and amounts that can be borrowed are larger. Thus, if you need to borrow a substantial amount of money that you want to pay off during a long period of time, and you have an asset that you can put up against that loan, then you should probably take out a secured loan. If you pay your instalments regularly, you have nothing to worry about (in most cases).

That is why you need to carefully calculate if you would be able to pay the instalments on time. Sure, a loan of £500.000 sounds great, but do you have the appropriate collateral, and will you be able to pay large instalments? Carefully measure your financial capabilities, carefully research individual loan offers, and then decide.

That said, I should probably warn you not to make too many credit applications just for the purpose of your research. Every time you apply for a loan, your credit history gets checked, and your credit rate might be lowered. So do your research before applying, read websites, use credit calculators, and then go speak to a banker.

Other people’s money

This is what loans are, other people’s money. If you ever consider taking out a loan, this is the first reality check that you need to come to terms with. If you take other people’s money, you will have to give it back, otherwise you will face dire consequences. Handling such money responsibly and similarly approaching the obligations that you have accepted should make you think twice about reneging regarding your promises made. I hope I do not have to stress that whoever loaned you the money, still considers this money his property, right until you pay that person or entity back what you owe, including interest dues. 

In today’s world, which is tailored towards relentless consuming, people’s needs are most of the time beyond their financial means. Clearly speaking, most people cannot afford the life they wish for, live beyond their means and at some point must enter into some kind of debt, because someone had to pay for it. Loans exploit this fact and provide relatively easily obtained money surplus for people who do not have debts, but are in proper standing, having gainful employment and perhaps even a home they can really call their own. These are the perfect customers for an eager lender, someone without financial burdens, but also without wealth, with a good credit rating, but without any debts attached to it.

At some point, every single UK citizen is, or can be, in a similar financial state and each and every person falls prey to the eager lender at some point. There is no citizen alive, which is without some kind of debt, except maybe the Queen. Everybody else is in some kind of debt, even if the debt is in form of credit cards or leasing payments for the car. The society of today relies upon people being in debt, because debt keeps the money flow going and the cash flow is the core of the currency value. In any case, what I am trying to tell you is: You will be taking out some kind of a loan, if you haven’t already and you will at some point need information in regards to how such loans work.

Let’s talk about loans, baby…

We know that banks are making huge profits at our expense if we take loans, but we still cannot resist taking them. There is too much stuff we want, too much stuff we are convinced that we need, the temptation is far too great. Is that wrong? Does that mean that we are weak?

Well, there is nothing wrong in wanting stuff, as long as we manage to control our desires and manage them realistically.

The most important thing about taking a loan is, first of all, to understand what types of loans are available. By understanding loan types and pairing them with our specific needs, we can minimise the damage and maximise the benefits of a loan.

So, my first advice would be to read, read and read, before doing something. I know it sounds tedious, but trust me, if you do not take the time to do it, someone will definitely take advantage of that fact. Basically, there are two general types of loans: secured and unsecured ones. But keep in mind that the bank always has a way of securing its assets, you cannot win, you can only pay your dues.

My name is Claire and I would like to help you make the right decision in terms of loans. It is not always smart to obtain money by putting yourself into debt, but sometimes there is no choice. For that very reason, you need to know what is out there and how you should consider what the proper thing to do is. Enjoy your stay and come back whenever you wish, I will try and keep the site updated as much as I can.