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Having trouble with loans?

Six tips to help you manage them


Finding a loan that’s right for you can be a tricky process - and if your debt isn’t handled properly, you could find yourself in a cycle of debt that can last for longer than you originally intended. Here are some effective strategies for taking out and paying off loans.

For many young adults leaving high school, loans become necessary. Whether they’re home loans, car loans or student loans, the majority of young adults will need some type of loan at some point in their lives. 

How do you take out a loan?

Different situations require different types of loans, but for most of your typical major purchases (like home and car), you’ll want to shop around. When looking for a private loan from a bank or a credit union, it’s important to compare interest rates, fees and repayment options. 

Whatever you do, try to avoid small payday loans. These can trap you with high interest rates and fees, which can keep you in debt for longer than you originally intended and cause you to pay back a lot more than you originally borrowed. 

For student loans, you may be able to apply for federally backed loans from the U.S. government. Federal loans often carry fixed rates, have multiple repayment options, and typically offer below market interest rates.
 

What is an interest rate?

 

An interest rate is what you pay the bank or credit union for the use of the money they’re lending you. An interest rate is usually calculated as an annual percentage rate (APR) of the total amount you’ve borrowed (also known as the “principal”). The APR is calculated by dividing the amount of interest by the amount of principal. Interest rates are fixed or variable. Variable interest rates are normally tied to a more widely used index rate such as Wall Street Journal Prime or the U.S. Treasury bill. These indexes adjust based on broader economic conditions. 

When you take out a loan, you’re not just paying back the amount you’re borrowing. You’re also paying the interest on top of that.

How do loans affect your credit score?

The strategies you use to pay your loan can affect your credit score and potential to take out loans in the future. If you don’t pay back your debts, miss payments or are consistently late with your payments, creditors will report these negatively to the credit reporting agencies which will lower your credit score. A reduced credit score will impair your ability to borrow in the future, and will often result in higher interest rates or less attractive loan terms. 

What are good strategies to pay back loans?

The most important strategy to paying back your loan is to make your loan payments on time every time. If you can, pay more than the monthly minimum. The additional payment will reduce your principal balance, which means you’ll pay off your loan sooner and less interest will be paid over the life of the loan. 

What do you do if your loan payments become overwhelming?

If you are having trouble with paying back your loan, talk to the financial institution that gave you the loan. Many times they’ll work with you to find a payment strategy that takes your financial situation into consideration. You may want to consider hiring a credit counselor, debt settlement organization or loan modification company. But keep in mind that they often charge you for their services. Most importantly, do not ignore your loan payments altogether. This will result in the financial institution taking additional steps, including possible legal action, against you.


Nahshon Lora from Goshen, Indiana, contributed to this article. Nahshon interned at Everence during the summer of 2016 and is a member of the Goshen College Class of 2019.

This material has been prepared for informational purposes only. Please consult with your financial professionals.