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Business & Investment

How Loan Repayment Schemes Work

There will come a time in most of our lives when we’ll need additional financial help so we can achieve our goals, whether that’s so we can boost our business with small business loans online, or to free up personal cash flow. When applying for a loan, it is essential that you make sure you can afford to pay it back. Having a plan in place to help you can be advantageous so you can adapt your budget and keep your credit score healthy. Below, we’ll look at how loan repayment schemes work and factors to keep in mind when paying off your debt.

What is a loan repayment scheme?

A loan repayment scheme or plan helps you to pay back money that you owe to a lender, whether that’s a mortgage, student loan, business loan or personal loan – these schemes can help you to reduce your debt over a set period. Having a repayment plan in place will not only help you to pay your lender back, but it will also give you an idea of how to budget through the month to make sure that you can make your repayments on time and in full. If you have a loan to pay back, having a repayment scheme in place could be advantageous to help you manage your debt. But why is it so important?

Why are they important?

When you take out a loan, you will need to be able to make regular payments back to your lender, if you don’t, or can’t afford to, your credit score will be affected, and it will be recorded on the credit report that follows you around throughout your life. Your credit score shows lenders how creditworthy you are, and how well you can manage your money. If your credit score is low, lenders will view you as a risk, which means you may not be eligible for financial help in the future. Implementing a repayment scheme means you can keep your credit score healthy by not missing a payment and being free of debt as soon as possible.

Types of repayment schemes

So, if you think choosing a repayment scheme will help you to pay off your debt, there are a few that you can choose from – we will look at some of the most common plans that you could choose from below:

  • Equal payments: If you want a fixed date on which your loan is paid off, this is the best option. You will pay the same size in both interest and instalments unless your interest rates rise.
  • Equal instalments: This plan works well if you want to make larger payments towards the beginning of your loan repayment term. If your interest rates rise, your repayment increases, and if your rate decreases, the repayment decreases. If your interest stays the same, it will get smaller with the more you pay off.
  • Fixed annuity loan: If you need to know how much your repayments are going to be, this type of scheme could be the best for you. Your payments will be the same throughout the whole payment period, and if interest rises, the loan term is simply extended. If interest decreases, the period shortens.

How to manage repayments

Maybe you’ve chosen one of the above payment schemes to help you get rid of your debt once and for all, or maybe you’ve created your own repayment scheme in line with your income to help you. If you would rather follow a plan that is easier to understand and fits your circumstances, there are a few factors that you will have to think about. One of the most important is making sure that you prioritise these repayments, as mentioned earlier, not keeping up to date with your payments not only means that you’ll be stuck with the debt for longer, but it also means that your credit score will be affected. You should implement paying your debt into your budget – you can even automate it so that you don’t have to think about it. Here are a few more considerations to think about:

  • Pay more than you need to: Paying more off your debt than you really need means that you can reduce your debt in a shorter amount of time.
  • Pay your most expensive loan first: Working on your most expensive loan makes sense because when it is gone, you’ll be able to free up more of your money, your cash flow will benefit, and you can use it to pay off smaller loans.
  • Shorten your monthly payments: If you can afford it, shortening the term in which you have agreed to pay back the loan with your lender may be advantageous. This generally means that you will be paying more, but it means you will be debt-free more quickly.

 

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