Long Term loans
Financial health checks are important to carry out in order to review finances and be able to plan for the future. In my previous blog (link), we explored income and various questions that need to be asked in order to ascertain the action that needs to be taken. Understanding your expenditure, how much it is costing you and how much you can save is very imperative.
It is important to have a complete and accurate view of your expenditure and this starts by compiling a list of all the outgoings using the following categories:
- Long term loans (5 or more years)
- Short term debts (less than 5 years, including credit card and overdrafts)
- Fixed costs (bills that have to be paid i.e. rent, insurance etc.)
- Variable costs (cost you can live without or control the amount of i.e. shopping)
In this blog, I will start by looking at the Long-Term Loans
Long term loans are usually loans that are taken to purchase houses, cars or to invest in big projects. It is important to consider the following:
Are you currently on a competitive interest rate and can you afford the repayments?
Long term loans tend to have lower interest rates as the money is being borrowed and paid back over a long period of time. Reviewing loans and researching current interest rates helps to identify and switch to a cheap and competitive rate where possible i.e. when you re-mortgage a house. If, however the repayments are too high it is always wise to seek financial advice to see if the payments can be spread over a longer period of time. This will be more expensive in the long run however, missing a payment can adversely affect credit scores. Attention needs to be paid to the terms and condition as some lenders will charge you if you change the agreed plan.
Do you have contingency plans in place?
As much as we can plan for the future, we can never know what will happen. It is important to plan for eventualities outside of our control. If you have dependants and have taken out a mortgage, taking out life insurance enables the expenses to be taken care of and the burden of the mortgage to not be passed on to the children.
In the UK, most employers offer statutory sick pay (statutory sick pay explained) , but this can be lower than your normal income. Other ways to insure yourself are to use income protection insurance (income protection insurance explained) . This will enable you to keep paying your loan if you are unable to work due to illness. Seek financial Advice for the best product to be recommended based on your circumstances.
Is it really worth it?
It is important to assess the reasons for taking out the loans to see if the product acquired by the loan is generating value. For example, if a house has been purchased it appreciates in value depending on market conditions. A van, may increase business thus increasing the overall benefits of the loan. If the costs outweigh the benefits cheaper alternatives should be considered.
Reviewing your Long-term loans regularly will enable you to see if they are still affordable, if you are on the right rates and will equip you to make informed plans for the future.
Categories: Personal Finance