Loan Commitment

What do we mean by loan commitment?

When applying for a loan, many people are driven mainly by the desire to own whatever item the loan is being taken out for, perhaps a new car or a house. This is all well and good, it would be a dull life if we didn't get excited about these things, but it can be too tempting to only think about the immediate goal of obtaining what you want, for example the slightly larger house than the one you can really afford, or the top of the range car instead of a more basic model. It is important when applying for any kind of loan to use common sense, rather than emotion, and think about the long term commitment of taking out finance such as, can you afford the monthly repayments not only now, but also possibly several years into the future and what the overall cost of the loan would be over this term. Remember, a loan is for the long term, not just for today!

How do I decide?

Any type of loan is a large commitment and before you apply you should really consider whether or not you actually need it. Once you've decided that a loan is the right option for yourself you should carry out an income/expenditure exercise, listing all your monthly outgoings (not just bills, but also things like food shopping and socialising costs) and deducting these from your monthly income to give a disposable monthly income figure. Any loan repayment amount should fit comfortably within this amount. You should also consider the long term implications throughout the term of the loan such as, future job security, future pay conditions (i.e. increase, decrease, loss of overtime etc.), a possible increase in other bills and future financial commitments (e.g. school fees etc.)

Can I get out of my commitment?

Once you have entered into a loan agreement, you are committed to repaying the total amount in full, plus any interest accrued and any other charges. This is usually by making the regular monthly repayments throughout the term of the loan. It is often possible to repay the outstanding balance in full in order to redeem the loan prior to the original end date. If you are considering repaying a loan early, you should contact the loan company directly to obtain a settlement figure. This is not necessarily the same as the outstanding balance and could be either more or less depending on how the loan interest is calculated. Some loan companies may also charge penalties for early settlement, particularly in the early years of the loan, whilst others may offer a discount if you repay before the end date.

What if my circumstances change?

There are many factors which can affect an individual's personal financial circumstances such as, change of career, redundancy, part time working, accidents, long term sickness or even death. Regardless of your situation, any loan commitments still need to be paid, either on an ongoing monthly basis, or as a single final repayment.

For changes within your own control, for example reducing your working hours to part time, you should ensure that you are still able to adequately service the loan prior to making any changes. For those changes in circumstances which are beyond your control, there are a range of insurance policies available which may be used to protect your loan repayments. These include accident, sickness and unemployment cover (often known as payment protection insurance), full income protection, life insurance and critical illness cover. Most loan companies will offer some form of protection for your loan when you originally apply.

Alternatively, you could take independent financial advice regarding the right kind of loan protection to suit your personal requirements. Loan protection insurance is often overlooked by a loan applicant, but this is important protection and some form of insurance should be regarded as part of the cost of your loan.