When you agree to borrow money from a lender, you enter into a legal contract. It’s your responsibility to ensure that you fully understand this contract before you sign it. Your signature tells the lender that you agree to meet your obligations by repaying the loan according to the contract.
Things to consider if you can't make a loan payment
It can happen to anybody. So if you are unable to make a monthly payment, here’s what you should do:
- Contact the creditor immediately, before the payment due date. Your call demonstrates your good faith. Most creditors are willing to make alternative arrangements if your situation has changed.
- Don't wait until the due date has passed or until the creditor calls you. Waiting puts you at a disadvantage when dealing with your creditor and that’s the last thing you want.
- Ask for a grace period. If it's a one-time occurrence, your creditor may give you a grace period, allowing you time to get your financial affairs in order.
- Renegotiate your loan terms. If your situation has permanently changed, your creditor may extend the term of the loan. That will spread your payments over a longer period of time, giving you room to breathe each month and reduce your stress.
The consequences of ignoring your loan obligations
A loan is a legal obligation. If you fail to meet the terms of the loan agreement, your creditor has the right to take court action against you to recover the balance of the debt. This could happen in several ways.
- If the loan is secured by a chattel mortgage, the creditor is entitled to take possession of the property that you have signed over as security. The creditor can then sell the property and apply the proceeds against the outstanding balance of the loan.
- If there is no chattel mortgage on the loan, or if you did not pledge any assets as security, the creditor can obtain a court order. A court order grants access to other goods that you own, which similarly can be sold to compensate for the default.
- If your spouse or some other person co-signed your loan application, the creditor will usually transfer the demand for payment to that person.
- If you were the sole signer, your creditor may resort — again by court order — to garnisheeing your wages. This means that the money you owe to the creditor will be paid directly by your employer. Until the full amount of the debt is repaid, your earnings will no longer pass through your hands.
You can probably prevent these consequences by being proactive and taking the steps outlined above. If your financial difficulties are serious and you cannot resolve them yourself, then you should consider credit counselling. These services are available through your lending institution or through an independent agency.
The last resort
If you are in over your head and can’t work out an arrangement with your creditors, then as a last resort you can declare personal bankruptcy. Bankruptcy will free you from most, if not all, of your debts. But it’s a painful experience and you’ll pay a very high price for this freedom. All of your assets other than your personal essentials may be sold by a bankruptcy trustee. Other than the money to cover the trustee's fees, the proceeds from the sale will be distributed to your creditors. What’s more, a bankruptcy stays on your credit record for a number of years. It will take considerable time and effort on your part to restore your credit rating. Bankruptcy is a drastic step, and may cause you and your family a great deal of hardship.
If, like many Americans, you often have too much month at the end of the money, it’s natural to think about getting a better job or a side hustle. Not that there’s anything wrong with that. But the real problem may not be how much you make but how much you spend. You may need to reduce expenses – maybe drastically.
How do you do that? There are many ways to cut expenses and save money. You just need to know where to look.
1. Keep Track of Your Spending Habits
If you’ve ever had a toddler in the house, you know how they can disappear if you aren’t keeping a close eye on them. Well, money is like that, too. The solution is simple but requires discipline: Keep a written record of what you spend. If you don’t know where your money is going, it’s nearly impossible to know where you can cut your expenses.
To be clear, we mean everything, even the dollar you paid for a soft drink. Simply doing this will make you think about whether you really ought to make that expense. Use a notebook, spreadsheet or budgeting app. Do this for a minimum of one month – two months is better – and you’ll have the information you need for the next step in the process.
Stretch Your Dollar At The Grocery Store
Clipping coupons can be a fun and easy way to save money on your monthly grocery budget brought to you by Money Minute.
2. Create a Budget
At its simplest, creating a budget requires three things: Knowing how much you earn, knowing how much you spend and making a plan to spend less than you make so you can save what’s left over. Once you know what your income and expenses are, you can prioritize spending to accomplish your goals.
Although it’s wise to keep records that account for every dollar, that method isn’t for everybody. Another approach is the 50-30-20 rule. Allocate 50% for things you need (basic housing, utilities, insurance, food, clothing, taxes, debt payments), 30% for things you want (eating out, entertainment, luxuries) and 20% for savings. It will take discipline on your part not to spend that portion devoted to savings.
However, you can do it if you look carefully at ways to cut expenses.
3. Update Subscriptions
Here’s an easy one: Are there magazines, streaming services or memberships you aren’t using very much or anymore. Cancel them. Has it been months since you actually used this product or service? Can you find a cheaper version? Get rid of it. If you find out you miss it, you can always re-subscribe when the money isn’t as tight.
Even though they aren’t costing you money directly, drop any email newsletters or merchandise catalogs that tempt you to make impulse purchases. Again, you may sign up again in the future, but you need to deal with now first.
4. Save on Utility Costs
You can’t do without power and water, but you can find ways to lower your utility bills.
- When incandescent light bulbs burn out, replace them with LEDs. They cost more to buy but last longer and use less electricity, more than paying for themselves. To choose the right bulb, use the lumens number, which indicates the amount of light emitted, rather than wattage, which measures the electricity used.
- Install a programmable thermostat for your heating and cooling system. This enables you to change how hot or cold you keep the house when you’re not at home, saving on utility bills. You can set it to return to a more comfortable temperature just before you get home from the office.
- Unplug every unused electrical device. Many electronic devices draw a small amount of electricity when not in use, and it adds up. Another way to block that excess electricity is using power strips or timers to turn devices off and on. “Smart” power strips can manage electricity so that DVD players only get power if the TV is on.
- Lower the temperature on your water heater. You probably don’t need it hotter than 130 degrees Fahrenheit, so it burns unnecessary energy to keep it hotter. Using a water heater blanket and insulating hot water pipes also saves energy.
- Seal energy leaks in your home. Caulk and weather-strip doors and windows that leak air. Seal air leaks where plumbing, ducting, or electrical wiring comes through walls, floors and ceilings. Install foam gaskets behind outlet and switch plates on walls.
- Turn your lights off when you leave a room.
- Repair leaky toilet and faucets. Take shorter showers. If it’s time for a new dishwasher or washing machine, buy one with an Energy Star rating to save water.
5. Cheaper Housing Options
Your dwelling place is a big expense, so any attempt to economize has to include housing. Although home ownership is hard-wired into the American psyche as the right way to live, it’s worth asking whether it’s right for you – or, at least, if it’s right for you right now. The advantages of renting include affordability. Not only may you pay less per month in rent than a mortgage, but you aren’t responsible for repairs, nor do you have to pay the upfront financing costs to get a mortgage or homeowner association dues.
If you’re already renting, it may be possible to save money on rent by relocating to a less expensive area or into a smaller rental house or apartment. Another popular option is to get a roommate. Rent for a two-bedroom apartment isn’t twice that of a one-bedroom, so getting a roommate drives down your monthly costs. Also, when it’s time to renew your lease, negotiate. Landlords want to keep good tenants, and if you move, they aren’t making money on your apartment while it’s vacant.
» Learn More: How Much Rent Can I Afford?
Of course, there are considerable advantages to home ownership. But if you’re going to buy a house, there are ways to ensure you have a lower mortgage payment. If you’re willing to commute a few miles farther, real estate prices may be lower. A down payment of at least 20% means you can avoid paying for private mortgage insurance. If mortgage interest rates have dropped substantially since you bought your home, refinancing can reduce your monthly note.
6. Consolidate Debts
Unless you pay cash for everything – a noble aspiration, but one few achieve – debt is likely a big part of your monthly costs. Auto loans, credit cards, student loans all add up. Each of those debts involve a separate expenditure, and each of them may have been as good a deal as you could have made at the time. But maybe you can do better by looking at your debt as a single unit.
Debt consolidation combines multiple debts into a single monthly payment. It can be particularly effective if you are carrying a balance on one or more high-interest credit cards or student loans. A single loan at a lower interest can lower your monthly costs and pay your debts off sooner – a win-win as long as you make your monthly payments on time. Transferring your credit cards into a single low-interest card also can be effective, but you may have only 18 months to pay off those debts during the introductory period before the interest rates go up.
Another option for credit card debt is a debt management plan that you can obtain through a nonprofit credit counseling program. The credit counseling agencies help consumers devise an affordable monthly budget that enables them to get rid of credit card debt. Card companies offer to lower their interest rates, and consumers make a single monthly payment to the nonprofit counseling agency, which then makes payments to each card company.
7. Shop for Cheaper Insurance
When you bought your home or car, how hard did you search for the best rates on homeowners and auto insurance? Not very? There’s no time like the present to shop around. There are plenty of insurance companies out there, and you may find that you can save money on car insurance and homeowners insurance either with different companies or bundling them together with the same company. Most insurance companies offer a bundling discount.
Raising your deductible – the amount you have to pay before insurance contributes to a claim – can reduce your monthly premiums on auto insurance. There are high deductible health insurance plans that also offer lower premiums, and they are especially appropriate for people who rarely seek medical care and just want to make sure they’re covered in case of an emergency. Term life insurance, which terminates after a set time period, has lower monthly premiums than whole life policies, which cover you for your entire life. Term policies can be set up to end when you retire and your family no longer depends on your paycheck.
8. Eat at Home
You have to eat. But you don’t have to eat out. We get it: Dining at restaurants or on takeout food is time-saving and probably tastier than what comes out of your kitchen. However, it’s a lot more expensive. A lot. You don’t have to commit to a full-blown, Dave Ramsey “rice and beans, beans and rice” diet to make a big impact on your bottom line. But you need to cut back.
Don’t feel confident in the kitchen. There are oodles of cookbooks and YouTube videos for beginners. Cook several servings of some items you like and freeze what you’re not going to eat for future meals. Buy nonperishable items. Use grocery coupons. Buy generic or store-brand canned goods instead of the well-known labels. Cutting back on buying cups of coffee can help reduce expenses, too.
9. Shop with a List
If you’re getting your food from a grocer instead of a restaurant, great! Now, you’ll want to save money at the grocery store, and a tried-and-true way to do that is to make a shopping list in advance and stick to it. Resist the temptation to buy something on impulse when you get to the store. If you organize your list around sales the store has advertised, so much the better.
10. Freezing Your Credit Cards
Credit cards are wonderfully convenient, which also is one of their drawbacks. It’s so easy to make a purchase you really shouldn’t, but you figure you’ll pay it when the credit card bill comes do. That’s how a lot of people get into credit card debt. And, even if you keep your credit balance at zero, money you spend on impulse purchases is money you don’t have for more important items.
So, find a way to make using your credit card less convenient. Keep it at home instead of your wallet or purse. It may sound crazy, but you might consider freezing – literally freezing – your credit cards in a block of ice. You’ll still have them if needed, but it will take time to thaw them out, and that time might help you consider whether that purchase is really in your best interests. (This is not the same as freezing your credit to protect yourself from identity theft, which can be a smart move but doesn’t necessarily help you cut expenses.)
11. Switch to Cash Only
If you’re really serious about drastically cutting expenses, commit to spending cash only – if not forever, at least for the time being. Doing this, forces you to account for every dollar you use, and studies indicate that people tend to be more frugal when they use cash than when they use credit cards. Using cash means you can’t live above your income.
To simplify this, your regular, essential bills – mortgage/rent, utilities and the like – paid by automatic withdrawals. The rest of your spending is limited to the cash you have left.
12. Pay off Your Debts
If you want to reduce expenses and save money, this is a no-brainer: Get out of debt. This is especially true of credit card debt, which typically carries much higher interest rate than conventional loans. Money you spend on interest is money you can’t spend on something else you need or want. It’s paying for the convenience of getting something before you could actually afford it. The longer it takes to pay it off, the more expensive that purchase actually was.
There are many strategies to pay off debt depending on how much debt you have. Refinancing debt at a lower interest rate can help, but it still requires a commitment to pay it down to zero. If you’re unable to refinance, make a list of all the debts you owe and rank them in order of highest to lowest interest rates. Then, pay off the highest interest debt first, then the next highest and so on. Make debt repayment part of your monthly budget. Set a target date for you to get out of debt, and do what it takes to make it.
Start Cutting Your Expenses Now
Don’t wait. Don’t hesitate. Don’t ponder and contemplate. Get started. The sooner you start, the sooner you finish, the more you save. If your debts are large enough that you question your ability to do it, consider speaking with a credit counselor at a nonprofit credit counseling agency like InCharge Debt Solutions.
Their credit counselors will help you create a budget and provide other information and services to get you out of debt and save you money.