My finances, my projects, my life
August 5, 2020

Loans: the right approach to paying one back (3/3)

Many people may have loans, but you should never take one out lightly. In a series of three articles, myLIFE sets out the right approach to this topic. After demonstrating the right approach to take when you need to choose a loan, in this third article we discuss how to manage the repayments.

In our first article, we discussed the right approach to take when you need a loan, then in the second we dealt with how to choose the right one. We reminded you that you will need to make compromises and learn to sift through the masses of information out there. Since we can only compare a certain number of product characteristics at the same time, we run the risk of focusing on superficial aspects. If you are here, it’s because you have found the loan that is best for you. Congratulations! Now, it’s time to deal with making payments.

Don’t just sit back and watch!

It’s time to take action. You’ve signed your loan and your project is finally becoming a reality. You need to get organised because your first monthly payments are coming up.

Like many consumers, you have quite a few financial obligations. Standing orders, automatic payments, bills – you may even have other loans to pay back. Regardless of your situation, you now have to find an even more delicate balance between payments with different due dates, types, terms and amounts.

Watching your debt multiply like this can be stressful and you may have underestimated the impact on your day-to-day finances. You may feel like you are slowly drowning, as if you were paralysed; you are a victim of status quo bias. Status quo bias makes us inclined to avoid active choices and having to face the fear of making the wrong decisions. If the financial pressure is building, react. Don’t let yourself spiral into a crisis that will be very difficult to deal with.

Your individual situation may improve or deteriorate, just like the economic environment, which may change as you pay back your loans. This is particularly pertinent for variable-rate mortgages that extend over several decades. Don’t panic. If this happens, check in with your banker on your overall financial situation. Together, you can discuss the option of refinancing a loan, setting an interest rate, or even combining several loans to limit your number of monthly payments.

This does require some work on your part, but it can be well worth the effort.

Don’t go it alone!

Dealing with mounting debt on your own doesn’t do anyone any good. Isolating yourself makes you more vulnerable to the influence of your own biases, which will not be sources of good advice in this situation.

When our brains are under pressure, they instinctively push us to reduce the number of debts we have, not the total amount of debt.

Make sure that you don’t become a victim of debt aversion. Wanting to pay it all back no matter what is a gut reaction that rarely helps us make the right decisions. When our brains are under pressure, they instinctively push us to reduce the number of debts we have, not the total amount of debt. Debt aversion can make you want to combine all of your loans into one, even if that increases both the term of the loan and the interest rate. This type of decision will only push you further into debt and will put you at risk of going into major debt.

You will, of course, feel better in the short term because you have fewer debts to pay back, but your feeling is incorrect. Even more so if you’re focusing on one limited amount of debt because of the pressure of monthly payments, but you still have other, more significant financial products to pay back.

It all comes down to priorities when dealing with pressure on your individual finances. And to make sure that you have the right priorities, you should have a professional evaluate your situation regularly. That’s what your banker is here for!

What should you take away from this series of articles on the right attitudes to take towards loans? The general rule to follow is that you should never make a short-term decision without considering its long-term consequences. A loan should be a vital means to making your life plan a reality, not an obstacle that haunts your daily life. Don’t let the mental load make your financial debt even harder to bear and stay aware of your own biases when you make decisions. You can always ask a professional for advice!