Personal Loans Budgeting Tips To Help You Become Debt Free

If you are struggling to make your minimum monthly debt payments or if you are concerned that the minimum payments are not effective in reducing your total debts, a personal loan may be an effective way to consolidate your debts and reduce your total debt load over a set period of time.

Before applying for a personal loan to consolidate your debts, take the following into consideration:

1. Credit Report:

When applying for a personal loan, a lender will first review a credit report. Any blemishes on your credit report, such as late payments to creditors or debts in collection, will signal to a lender that you are a credit risk. Even one unpaid parking ticket can spell disaster for your credit score. Another red flag is recent credit inquiries by multiple lenders, which may signal you have recently applied for and acquired – or been declined – new credit. Any of these of these factors may lead to you being turned down for a personal loan.

Tips for keeping your credit report healthy:

• Obtain a copy of your credit report (www.consumer.equifax.ca/home/en_ca / http://www.transunion.ca) to see what your creditors are reporting and to detect any errors
• Contact the credit bureau to have any errors corrected
• Ensure your debt payments are on time for at least six months prior to your loan application
• Don’t request or accept credit limit increases or apply for new credit for at least six months prior to your loan application
2. Budget / Cash Flow:

It is important to accurately calculate your monthly income and make a realistic list of expenses before you consider applying for a personal loan. After all, if debt reduction is your goal, you must ensure you have enough cash to cover a loan payment. Moreover, you need to ensure you are not spending more than you earn, which will only drive you further into debt.

Tips for calculating and managing your cash flow:

• Calculate your income: Calculate your net (take home) monthly income based on pay periods. For instance, if you are paid weekly, multiply your weekly cheque by 52 weeks and divide by 12 months. If you are paid biweekly, multiply your biweekly cheque by 26 weeks and divide by 12 months. If your paycheque is always different, take an average of your year-to-date income.
• Determine your expenses (excluding debt repayment): First, make a list of your fixed monthly expenses (i.e., those that don’t change) such as rent or mortgage, utilities, car payments, insurance, etc. Second, make a list of your variable monthly expenses (i.e., those which change month-to-month), such as food, car gas, clothing, etc. Third, make a list of irregular expenses that don’t occur every month, such as gifts, dentist visits, vet bills, haircuts, vacations, car repairs, etc. Last, determine the monthly average of your irregular expenses by taking the yearly total and dividing by 12. Set aside sufficient funds each month to cover your budgeted irregular expenses and keep these funds in a separate bank account.
• Calculate your cash flow: Subtract your fixed, variable and irregular expenses from your income. The difference is your cash flow. If it is a positive number, a personal loan may help reduce your debts. If it is a negative number, you are spending more than you earn, which means you need to reduce your expenses to bring them in line with your income. If you don’t address a negative cash flow issue, you will continue to use credit to make up the difference and a personal loan will not fix your problem.
• Make necessary changes to your cash flow: Consider ways to increase your income and / or decrease your expenses to improve your cash flow.
• Monitor your cash flow: Regularly monitor your income and expenses to ensure you have control of your cash flow. 
3. Build a cash reserve:

When debt reduction is your goal, it is important to have a cash reserve to cover unexpected expenses or emergencies. If you don’t have a cash reserve, you will have to juggle monthly expenses or – worse – borrow money again when the unexpected happens, driving you further into debt.

Tips for building a cash reserve:

• Financial experts recommend you have a minimum of three months’ income in savings. To calculate the minimum recommended amount, multiply your monthly income times three.
• Building up a cash reserve takes time and perseverance. Some financial experts recommend that if you have debt and no savings, you should balance debt repayment and savings until you save the minimum recommended amount. As an example, if you have a positive cash flow of $500 each month, $250 per month should be placed into savings and $250 per month should be used for debt reduction. Other financial experts recommend that debt repayment should be more heavily weighted.
• How you build up your cash flow reserve is a personal decision and will depend on your goals and cash flow, but do make a commitment to saving the recommended minimum amount. 
4. Make a commitment to cut up or lock up all credit cards you are consolidating:

One of the pitfalls of debt consolidation is using the credit cards and lines of credit that have been paid off with a personal loan, which will lead to greater financial distress. Using our tips for cash flow management and building a cash reserve is crucial for ensuring you stay on the straight and narrow debt repayment track and don’t go further into debt.

5. Negotiate your interest rate if you are approved for a personal loan:

Did you know you can negotiate your interest rate with a lender? Posted rates are guidelines and most consumers agree to them without question, but lenders can provide lower interest rates in most cases. Make sure you ask for a lower interest rate (the worst they can do is say “no”) or ask what you can do to qualify for a lower interest rate. If you can offer some form of loan security, such as an asset or a co-signer, you may qualify for even lower interest rates.

If you follow our guidelines and successfully apply for a personal loan, congratulations on your journey toward becoming debt free.

If you have any problems with your credit score, cash flow and / or you are unable to qualify for a personal loan, your local MNP Ltd. Trustee will be happy to meet with you to assess your financial situation and recommend specific steps you can take to improve your situation and alternative methods to deal with your creditors.