Many people believe that finance is all about saving and expenses. But looking deeper into the matter, you will see that it’s a multifaceted subject, including loans.
The general idea is that having a loan is a bad thing. But not all loans are bad since the bank uses your credit score to tell whether they can trust you with money or not.
Bad Loan vs Good Loan
Taking a loan can be a big step in your finance management journey. You need to submit multiple documents and the bank will assess your capacity to pay back the loan.
Most people fail this assessment because they don’t have a good credit history. Or they don’t have enough assets to put as collateral.
Anyhow, you need to know the difference between good and bad loans. A good loan is a productive loan that will improve your credit score. Student loans and house mortgages are examples of good loans. Most of the good loans are when the debt will improve your credit score because it can turn into an asset that has a financial value.
While a bad loan is the consumptive one that you spend to have fun. A vacation to Ibiza, regular eating out or ordering in count as bad loans, because they don’t add to your credit score.
The bank calculates your repayment capability based on your income on your credit history. If you tend to only pay for the minimum, then you’re less likely to get new loans or offers. Because the bank thinks you’re struggling to repay your current debts.
Managing Your Loan
Loan management is part of managing your finances. The key is your understanding of how you can pay back the loan with interest within the time limit or not.
One mistake that many people repeat is to take more loans to repay their old debts. Unfortunately, it only means they are digging themselves into a deeper hole.
Anyhow, managing your loan is not only about your repaying ability. But it’s more on how you manage your loan to be part of your finance plan for the future. You may be able to repay all of your loans, but it will mean nothing when you spend most of your income on loans.
When to Consider Refinancing
As you learn more about loans, you will hear this term often, refinancing. This practice is basically prolonging your debt by taking up a new one to repay the old debt.
The new loan will be at a lower interest and for a longer term. You also won’t get the whole amount, because the bank will use part of it to repay your old loan.
One common example of refinancing is when you’re trading your old car for a newer model. They will calculate the amount you have paid for your old car and include it in your new loan. Therefore, you will get the newer model at a lower interest.Loan management is a crucial part of finance management as a whole. When you understand how to manage your loan and overall finances, you can improve your credit score and earn more things in life.