Merely taking out a loan can put you in a tough financial situation. You may be obligated to make payments to a lender for many months, if not years. And the interest paid can be as much or more than you borrowed to start with!
However, it is critical that you repay the loan on time to avoid late fees, penalty interest rates, and other charges.
Credit Card Penalty Rates Can Be Hefty
On average, a credit card comes with an interest rate of 15 percent. However, if you make a late payment, your APR can jump to as much as 29.99 percent. This may happen even if you have good credit and have made all previous payments on time.
You may also be charged a late fee as well as a returned funds fee if the payment wasn’t made because you didn’t have enough money in your checking account.
Your Items Could Be Repossessed
On top of paying late fees and higher interest rates, your items could be repossessed.
For example, to avoid a title loan repossession, make sure that each payment is made by the due date on the loan documents. In some parts of America, your car can be repossessed after as little as one week after a payment is missed. Typically, you will not be told about the repossession until you see your car being towed away.
What Happens If You Can’t Make a Payment?
If you know that you can’t make a payment, talk to your creditor right away. It may be possible to extend the payment due date or roll the payment back into your loan.
If you have a good history with your creditor, it may be possible to have late fees and other charges waived.
A creditor may also decide to not charge a penalty interest rate or only apply it to the payment in question.
How Can You Ensure Timely Payment?
To ensure that a payment is made on time, you should have it come directly out of your bank account on the same day each month. You can also try to make payments on a biweekly basis to ensure that at least a portion of your balance due each month is sent on time.
It may also help to have a calendar that lists all of your upcoming due dates and how much you owe. In lieu of a calendar, you could choose to have alerts sent to your phone or laptop when a payment is due soon.
When Should You Consider Bankruptcy?
Once you get trapped in the cycle of debt, it can be tough to get out of it. For some, the only way out is to file for bankruptcy. That’s what happened to me.
Experts say that you should file if you don’t think that you can repay the debt in the next three years and payments account for more than 50 percent of your income.
Don’t Let Loan Repayments Haunt You
When you take out a loan, you need to know that you can repay that money in a timely manner. Otherwise, you could lose your car, home or other possessions to your lenders.
It may also be necessary to file for bankruptcy or dip into your savings to repay a debt, which could wreak havoc with your finances in general.
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This article originally appeared on Life on a Discount and was republished by My Life, I Guess with permission.
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Amanda Kay, an Employment Specialist and founder of My Life, I Guess, strives to keep the "person" in personal finance by writing about money, mistakes, and making a living. She focuses on what it’s like being in debt, living paycheck to paycheck, and surviving unemployment while also offering advice and support for others in similar situations - including a FREE library of career & job search resources.