Friday, 31 January 2014

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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