What You Should Know About Your Loans
Know the Facts
Making a big purchase or securing an amount of money is always fun. Having and maintaining payments on loans is never fun. It is important that you know the basic facts about your loans so that you can be on track for repayment.
Ideally, you should have a filing system (paper or electronic) that lists facts about your loan such as: the lender name and contact information, the length of the loan, the interest rate on the loan, the payment schedule, the term of the loan, etc.
Names of Lenders and How to Get A Hold of Them
Most frequently people loan from banks. However, you may have your loan granted through a financial institution or even a private party such as a family member. You should know who holds your loan: in other words, who owns your stuff and who you need to pay to make it officially yours.
From time to time you will want to contact your lender about questions you have. It is wise to have a go to place where you keep such information as the address and telephone number of your lender.
Where to find this information:
You most likely had to jump through some hoops to get your loan: credit score application, listing of assets, proof of salary, listing of other debts, etc. All of these lead to piles and piles of paperwork. Most of the time, you are required to sign these documents before your loan is granted. Your signature is your binding proof that you have read and agree with your current financial position (that has been researched as a part of the loan application) and also shows that you agree to the terms of the loan. In other words, at one time or another you have received and signed these documents. Best case scenario is that you have kept all of this paperwork and filed it in a very safe place.
If you have misplaced this information, lucky for you, your lender will find you! Lenders have a way of keeping track of you since it is your money (and all that interest they are charging you) they are so eager to receive! You may get a statement in the mail each month with the name, address, and phone number of the lender listed on it. In case you've requested paperless statements, these things can be found online.
How Much Are You Paying Each Month/Year?
If you are the one in charge of you or your family's budget, you are probably aware of these exact numbers. If you are not the primary business person of your family or if you have an accountant who handles these things for you, you may be clueless of this question: "How much are you paying each month?"
Why is this important to know?
Well, for basics, you are trying to spend less than what you bring in each month. If you are paying a $2000 mortgage each month, but you are making financial decisions on a whim, it is easy to see how you could come up short on the mortgage bill if you've spent a lot in another area that month. Many couples fight over money. Being in the know as to what your "fixed" expenses are each month can be the most basic start to mapping out a basic budget. How were you to know that you couldn't splurge on the Disney vacation when you had no clue that your mortgage payment wasn't paid yet for the month? Discuss the amount of money that is being paid to your lender with the appropriate people in your life: the ones who are also responsible for tackling the money challenges in your family. Communication and being in the know can go a long way in everyone working together as a team to knock out debt.
Interest Rate and Length of Loan
Chances are you have long lost forgotten the exact interest rate of your loan(s). You have probably also lost track of how much time left you have on the loan. The reason for you forgetting these things are normal and expected: you've been plugging along month after month making your payments, and, on a month-to-month basis, who really cares about such things.
However, these are important things to keep in mind. Even if you revisit them only once a year (say, during tax time), it is a good idea to know ballpark figures in each of these categories:
How much interest am I paying?
Look on statements to find this information or call your lender. You may be shocked to find out that your house is a "cheaper" loan than your car or your home equity loan interest rate is 4x that of your school loans or that your credit card interest rate is the highest of them all.
Once you know the percentage rate of your loan interest, you can make better decisions on how to go about absolving your debt(s). There are countless books, seminars, and websites devoted to teaching you how to choose which debt to tackle first: the largest debt, the highest interest rate loan, the lowest amount. The decisions can be daunting at first, but if you can first educate yourself with the amounts of interest you are paying, you will be better equipped to make good decisions about what to do about them.
For example, let's say your long term goal is to pay off your home loan as soon as possible. Your 5 year goal is to be debt free in all other areas besides your mortgage. Great goals; but how do you practically go about making your plan to do this? First you are going to need to know specific numbers: payment amounts and interest amounts. Gathering that information will help you decide which debt to go after first. If your credit card bill is costing you the most in interest per month, knock it out first before going after your car loan. If your home loan interest amount is lower than your student loan rate and your medical bills that you have, aggressively pay these off before going after your home loan. Simply put, aim to pay off the loan with the highest percentage rate first. It will save you the most money in the long run because interest money is not money you are getting back.
If you are paying a high percentage rate, periodically do your research and ask questions about refinancing. The lending institutions and most banks will help you with the mathematical formulas to help you figure out whether refinancing is worth it given your exact circumstances. A lot of number crunching may be necessary to take into account all the terms of refinancing: cost of refinancing, how long you choose to carry the loan, if you are able to add more equity to your purchase before refinancing... all of these and more play a part into whether it is worth it in the long run to refinance.
What is the Length of My Loan?
So, now you know how much you are paying on your loan and your interest rate. Now it is time to take into account the length of your loan. In other words, how long is the time frame in which you are supposed to be paid up?
These time frames vary greatly: days, months, years, decades... Knowing when your loan will be paid off is often a freeing thing, giving you something to look forward to.
If the length of the loan seems daunting and depressingly long, try paying it off sooner. There are fabulous websites available to help you with specifics, but most loans can be paid off years earlier by just adding ONE extra payment a year. Chipping away at your loans by tucking an extra $50, $100, or more when possible is a great investment: you are buying your freedom earlier and skipping out on loads of money paid to interest. Key fact: the less interest you pay, the better!