If you’ve ever borrowed from any moneylender, you’ve experienced signing off on a repayment plan. This plan gives you an idea of how much you must pay every month until you pay off the entire principal amount. Repayment amounts often include interest, administration fees, and other fees the lender charges.
Sometimes, though, repayment plans can get out of hand. They can become unrealistic given your current financial situation. Here are four signs you need to watch out for.
Monthly repayments are too much
This is the first and clearest sign that your repayment plan is not realistic. If the monthly repayments are beyond your means to pay, then you are setting yourself up for failure. You can’t get out of debt this way.
You should be able to comfortably pay your monthly repayments. Before agreeing to a repayment plan, look at how much you will need to repay per month. Does this amount fit with your income and budget? If it does not, negotiate a more favourable repayment plan for your financial situation.
The Monetary Authority of Singapore (MAS) even has guidelines on the maximum amount of money you can put into loan repayments. This is called the Total Debt Servicing Ratio (TDSR). In particular, you are only allowed to use up to 55% of your gross monthly income for debt repayments.
Take note that the TDSR is a maximum limit. Thus, it’s not ideal to always allocate 55% of your income to repaying your loans if you cannot afford it.
No room for flexibility
Repayment plans ought to have the ability to be adjusted if your financial situation changes. Let’s say you happen to earn more, so you can pay off your loan sooner. Then your repayment plan must allow for higher monthly repayments as your budget allows.
On the other hand, if you happen to face financial difficulty, you should be able to negotiate lower monthly repayments temporarily. Once your finances stabilise, you can go back to the original repayment plan. This kind of flexibility makes debt repayment less stressful and more achievable. But if your lender is too strict with its terms, then the repayment plan may end up being an unrealistic one.
Remember, your repayment plan must have room for emergencies that may occur while you’re paying down your debts. After all, these unfortunate events can happen at any time, so you must have an ample financial safety net in place. Your emergency funds should be spent on emergencies, not debt repayment.
You end up sacrificing your basic needs
A good repayment plan does not require you to hold back on your basic expenses like food, rent, utilities, and transportation. You should still be able to afford those basics while slowly paying down your debts. This way, debt repayment will not end up stressing your finances.
Anytime you have to cut back spending for your basic needs, you know your repayment plan is not realistic. It’s not worth sacrificing your basic needs to pay down debt sooner. If you do, you may end up affecting your health, and hospital bills will add to your financial burdens.
Conclusion
Paying your debts must never be too much additional burden to you financially. To make sure it stays that way, take note of these four things. While borrowing and paying your loans, you must stay financially well. That way, you can achieve or maintain a financially healthy lifestyle.
