A Guide to Loans and Debt Management

Whether you’re taking out another loan or paying toward your balance, a lot of decisions have gone into your current financial situation. A personal loan can be your new best friend or your current worst enemy. All financial resources can either be used wisely or poorly. At Alltru, we want you to make the best decisions possible when it comes to your finances. As your financial partner, we have the tools and resources you need to take control of your financial situation. This ranges from granting loans to helping manage your debt.

Managing your money well can be life changing. We are here to help walk you through what you need to know before you take out a loan or if you already have a balance to pay off. Let’s get you to your financial goals.

Personal Loans

A personal loan is a specific amount of money that you borrow at a set term with a fixed rate. At Alltru, we offer personal loans with varying terms and rates. Personal loans can be used for nearly anything.

Personal loans are a common type of credit. People tend to take out personal loans for these six reasons.

1. Debt Consolidation. While different studies show different amounts, all the reports have one thing in common – most Americans have some kind of debt. This debt ranges from credit cards, to mortgages, auto loans, and more. Instead of trying to juggle several payments throughout the month, many use a personal loan to consolidate their payments into one. This means that you can go from five plus smaller payments per month to just one larger payment per month.
2. Major Purchase. Maybe you have a large purchase you want to splurge on, such as new furniture. Maybe you have several semi-expensive purchases that come with a life event like moving, which could include renting storage units, hiring a moving company, and paying a realtor. Whatever the situation, you can use a personal loan to help. Plus, interest rates on personal loans tend to be less than interest rates on credit cards. If you need more than a month to pay for these expenses, a personal loan is a better option.
3. Emergency Expenses. When an unexpected situation suddenly arises, such as a flooded kitchen or the passing of a loved one, you might not have the funds in place to cover the cost. Fortunately, personal loans can be approved quickly. Personal loans also don’t require collateral. This means that you won’t risk losing anything else in your desperate situation.
4. Home Improvement. Many people use personal loans to finance their home improvement projects. While home improvement loans may not be available to everyone based on their individual circumstances, a personal loan can be a flexible alternative. Plus, personal loans often have shorter terms, allowing you to pay off your home upgrades more quickly.
5. Medical Expenses. Hospital bills can be hefty. Even with good health insurance, the costs can still be unmanageable at times. With a personal loan, you can pay toward these expenses, whether anticipated or not. This way, you can keep your health the focus of your priorities and know that you have a plan in place to cover the expenses.
6. Vacations. Many people use personal loans to pay for that once-in-a-lifetime vacation. From a honeymoon in Cancun to a retirement trip across Italy, international traveling comes at a price. While some have a negative stigma around using a loan to pay for a vacation, you are still in control of your finances. You can take out your loan before you travel. This way, you know exactly how much you can spend on your getaway.

Debt Protection

If you have debt that will be on the table for several months or years to come, many institutions suggest or require debt protection. Debt protection, or payment protection insurance, serves as a safety net for your family in the event of involuntary unemployment, disability, or death.

In addition to the basic debt protection, you can add additional coverage to cover accidental dismemberment, terminal illness, hospitalization, family medical leave, and death of a dependent.

While conversations about debt protection are uncomfortable, there are many benefits to having the coverage. First, monthly payments are easy and affordable. Payments can be included in the same bill as your loan. You only need to make one payment to cover the loan and the debt protection. Second, you receive immediate coverage. There is no waiting period leaving you on eggshells hoping nothing traumatic happens before your plan starts. Third, it helps your family in the long run. No one plans for these life-altering events to happen. Debt protection is there for when you need it in your most desperate situation.

If you believe you are at risk for any of the previously mentioned situations to happen, I suggest you add debt protection to your loan. While it will cost you a little more each month, the benefit it will provide your family if needed will be a relief. Plus, you can have peace of mind knowing your family will be financially relieved if anything drastic happens to you.

Debt-to-Income

When you apply to take out a loan, your approval and interest rate are determined by a variety of factors. In addition to your credit score, another major consideration is your debt-to-income ratio. A debt-to-income ratio, or DTI, is a score expressed by a percentage that tells a potential lender what percentage of your monthly income is required to pay toward your debt.

Your debt-to-income ratio can also be beneficial for your knowledge too. It can help you determine if you are comfortable taking out another loan in your current financial situation.

To determine your debt-to-income ratio, first add the minimum totals of your monthly debt payments. This includes a mortgage, marital debt, auto loans, student loans, minimum credit card payments, and other loan minimums. Make note of this total.

Next, divide the total of your monthly payments listed above by your gross monthly income. Convert this decimal to a percentage. That’s your DTI.

The lower your DTI, the less of your income is required to pay toward your debt each month. a low DTI can result in getting approved for a loan with a lower interest rate. A high DTI can result in a high interest rate or not getting approval on a loan.

Lenders know that if they grant you a loan, your DTI increases. This means that a larger percentage of your income is going toward your debt payments. They don’t want to be the lender that doesn’t get their minimum payment each month.

While a large DTI can be discouraging, there is hope. Paying off your debt lowers your DTI. Keep reading to find out ways you can pay off your debt faster.

Payday Loans

Sometimes, the unexpected happens and you need money, fast. As previously mentioned, a personal loan from Alltru has a fast approval process and requires no collateral. Some may consider payday loans due to their smaller amounts and ease of approval, even for those with lower credit scores.

Payday loans are not good. Period. The concept sounds good in theory. The reality of payday loans leads you down a trail of more and more debt.

A payday loan is very short-term loan. Payday loans are typically $500 or less. The term to pay off a payday loan is only a couple weeks – usually by when you receive your next paycheck.

The problem with payday loans is that they aren’t realistic to pay back so quickly. Payday loan lenders either require you to give them a post-dated check or access to your checking account so they are guaranteed their money back. However, this leaves you with significantly less money in your account because of fees. Payday loans average around a 400% Annual Percentage Rate (APR) which is s super high when compared to normal loan rates.

Because the interest rates are so high, the borrower usually needs another payday loan to pay for the first! This created an endless cycle of payday loans, often resulting in a significant amount of debt acquired over a short period of time. It keeps growing fast too because of the high interest rates.

Alltru offers an Employer Benefits program to small businesses in the Greater St. Louis area that features a much safer option to a payday loan. The interest rate is significantly less. Plus, it helps improve your credit score.

Take Action Before Payday

Having a plan in place to pay for expenses before payday, even if you got a payday loan, will help set you up for financial success in the short term and long term. Making a plan starts with making a budget. While there are many different budget methods to follow, no method will tell you to never pay your minimum balance. First, write down your mandatory monthly expenses followed by the expenses that vary and maybe aren’t necessary.

Next, organize your bills by when they are due during the month. Then slot in your paycheck. See if you have the necessary funds to pay for your expenses when they are due. If you’re in the negative, see if you can adjust the due dates, such as going grocery shopping a couple days later or paying for your electric bill on the 20^th instead of the 13^th. Do not do this if this puts your finances or health in danger. This is a convenience tip. If you have excess by payday, great! Plan to save this money or use it to pay higher than the monthly minimum toward one of your loan balances.

When it’s finally payday, you know exactly where your money needs to go. If you cash out a paycheck, use the envelope method so you don’t go overboard in some areas of your budget. If you prefer digital, open separate accounts with Alltru’s online and mobile banking to follow the same concept.

Small Steps to Get Out of Debt

If you have been in debt for a few months or years, you’ll eventually start to get an itch for getting out of debt. Picturing how your life could transform can be a powerful motivator to start changing your habits. Some people make small, spontaneous purchases that add up fast. Others make large purchases that cost more than they can really afford. No matter the reason you are in debt, we have tips that can be applicable to your situation.

Here are some small steps you can take to start changing your habits and climb out of debt:

• Wait to buy. If you’re the hypothetical person mentioned above that makes small, spontaneous purchases, this can make a large impact for you. Get impulse spending under control by waiting to buy. In the meantime, try to find the same or a similar item for a better price. The longer you wait, the more you might realize that you and your bank account will survive without another purchase.
• Monitor your finances closely. According to CNBC, consumers spend around $133 more on subscriptions a month than they realize. Automatic subscriptions and purchases are easy to forget about. Suddenly, you’ve spent more money than you meant to and didn’t get any benefit from your purchase. Check your bank statement and see if you are paying for services that you aren’t using enough, such as Amazon Prime, Hulu, or Spotify.
• Don’t carry a balance. If you can’t pay your credit card bill in full at the end of each month, you will start paying interest. There are three ways to not carry a balance. First, pay with cash or debit for your purchases. This way, you immediately pay what you owe and can go about your day. Second, keep track of what you use a credit card for each month so you know how much will be due when your bill arrives. Or, you could follow the budgeting strategy above and not use your credit card to pay for bills. If you don’t use your credit card, you won’t have a balance. No balance means no potential interest to pay next month.
• Automate your savings. Instead of having your entire paycheck deposited into your checking account, move a percentage over to your savings account. This way, you can start earning interest on your saved money and have a safety net for when unexpected expenses arise.
• Live under budget. Take a deep dive into your finances and create a budget where you don’t need to spend every dollar that comes on payday. Living below your means allows for the occasional splurge without the guilt that may follow. You can also use this money to set up future you for financial success.
• Transfer balances. Examine your interest rates on your credit cards and, if possible, move your balances to the card with the lowest APR. This way, you’ll pay less in interest and more toward the principal. Alltru has credit cards with low rates to fit your financial needs.
• Start selling. We tend to have more possessions than we know what to do with. This can work to your advantage! Sites like Facebook Marketplace let you sell your used items locally. Deposit the money you make from these sales and apply it toward your balance each month. Even if you can make your minimum monthly payment without this extra income, use the additional funds to make a larger payment. This will go directly toward the principal, helping you pay off your debt faster and save on interest.

Big Steps to Get Out of Debt

The small steps to get out of debt can require great disciple. Like any muscle, the more you exercise it, the easier it becomes. The same is true for paying off your debt. It can be hard getting started, but seeing your progress after you’re a few months in is motivation to keep going.

In addition to debt consolidation, there are two major strategies to use to pay off your debt faster. Each has pros and cons. Do your best to realistically evaluate your situation to determine which method is best for you.

The first strategy is the snowball method. With this approach, you make the minimum monthly payments on all your debts, but any extra funds go towards the smallest balance. Once the smallest balance is paid off, you take the amount you were paying on it and apply it to the next smallest balance. Even though your minimum payments decrease as debts are paid off, you continue paying the same total amount each month. This process repeats until all your debts are fully paid off!

One pro of this method is that you will see small wins. You can go from paying toward five debts to four, to three, to two, to one, and then zero. A downside to this method is that you might end up paying more interest over time since you have a few debts that won’t be completely knocked out until the end of your journey.

The other strategy is the avalanche method, which is essentially the opposite of the snowball method. Instead of focusing on the smallest balance first, you prioritize paying off the debt with the highest interest rate. . By tackling high-interest debts first, you can potentially save more on interest over time.

A downside to the avalanche method is that the method can be discouraging. You won’t see a lot of little wins with this strategy because it can seem like you aren’t making a lot of progress.

Conclusion

No matter if you are going into debt or want to pay off your balance, we are here to walk you through every step of the way. Keep in mind that not all debt is bad as long as it’s managed debt. Taking control of your finances can look different for everyone. You might want to take out a personal loan to pay for a vacation or a shopping spree for home furnishings. Matters might be more serious and require a loan to pay for medical expenses. You could have a combination of needs and want a personal loan to consolidate your balance to have one, large payment.

With these debt facts and payment tips, you can watch your balance reduce to $0.00 and be debt free soon. It takes discipline and determination to stay committed to paying off a loan.

Regardless of your experience, you are learning how to manage your finances well, and that’s worth celebrating. Let Alltru be part of your journey to financial success.