How to Maintain Financial Wellbeing While Having Loans

How to Maintain Financial Wellbeing While Having Loans

Barbara Londono, AVP, Sales Leadership

Chances are, you have debt.
As we all navigate the known and unknown impacts of the COVID-19 crisis, Affinity’s priority is the financial wellbeing of our members. We are helping you understand and deal with new disruptions to your finances, while managing existing debt -- without turning to credit cards.
Though credit card balances are likely a big part of your debt, some of the most important sources of debt in the U. S. come from loans. These include student loans (accounting for $1.5 trillion1 worth of debt), mortgages ($15.8 trillion2) and auto loans ($1.2 trillion3). For many Americans, paying back these loans can seem overwhelming. Some people may have the attitude that, as long as you still have loans to repay, you haven’t truly reached a state of financial wellbeing or independence. But there are two important things to remember:

  • (A) Loans are often a necessary part of life; having some kind of debt isn’t always a bad thing.
  • (B) You can still thrive financially while paying back loans, provided you have the right perspective and a plan for ensuring that debt doesn’t overtake your life.


Person holding tablet

Here are four things you should do now to safeguard your financial wellbeing for the near future.

Can You Have Loans and Financial Wellbeing at the Same Time?
In many ways, loans are what make financial wellbeing possible. Without student loans, many people wouldn’t have been able to afford to go to college and get degrees (or to obtain certifications and/or training) that led to a job paying decent wages. Without mortgages, few people could afford to buy a house. And a car is often necessary to get to your place of work, while paying cash for an auto isn’t always an option. Furthermore, not having loan debt can actually hurt you financially. We live in a world where credit scores play a key role in our ability to obtain financial products and resources, and avoiding any type of loan throughout your life could result in a poor credit score that fails to show financial institutions that you have a track record of successfully managing debt. So, don’t stress out too much about your loans. Many have them, and without them you might not be better off.

Should You Attempt to Pay Off Your Loans as Quickly as Possible?
If you have a long-term loan – say, a 30-year mortgage, 10-year student loan or a five-year car loan – you might be tempted to make payments beyond the normal minimum payments. When it comes to reducing your debt, this doesn’t hurt. But it can result in you quickly burning through your disposable income and having nothing left for paying off other, more urgent types of debt (like credit cards), making valuable investments or just enjoying your life. As many people’s income sources are decreasing or possibly coming to halt altogether right now, it’s important to manage the loans you have well, to avoid the need for taking out extra loans in order to manage until the COVID-19 crisis passes. As with overly rigid diets, going overboard on loan payments tend not to be a sustainable approach, especially when it comes to something as big as a mortgage. As long as your income and debt level stay at the same rate, you can stick to your original target, paying whatever percentage of your income (10-20 percent is generally considered ideal) with which you’re most comfortable. If money is tight at the moment, just be sure to proportionally increase your payments as your income increases again. That way, you’ll pay off your loan faster without causing any extra stress or anxiety.

How Do You Prioritize Your Loans?
When it comes to making loan payments, you do want to have some type of prioritization. Some people decide that loans with the highest interest rates should be tackled first; other people prefer to work on paying off their bigger loans or starting with the smaller balance that’s easiest to pay off. None of these strategies are right or wrong, but you should keep your priorities in mind. If your cash flow is slowing due to job loss or income reduction due to COVID-19, it’s ok to pay minimum balances on each loan while focusing your energy – and dollars -- on paying down the top priority loan. Ultimately, only you can decide your own priorities, and you should focus on whichever loan is weighing most heavily on your mind.

What If You’re Struggling to Make Payments on Your Loans?
When you take out long-term loans, you generally do so at an interest rate and monthly minimum payment that corresponds with your income. But what happens if your income decreases – or unexpected expenses arise that absorb more of your pay and/or assets? No one could have anticipated this global health and economic crisis; it’s taking a toll on millions of Americans’ jobs and finances, and many may not feel financially prepared to weather this storm. If and when you find yourself struggling to keep up, one option is debt consolidation: merging various loans into a single loan with a lower interest rate than one or more of the existing loans. Affinity offers debt consolidation loans with no fees and competitive interest rates, as well as student loan consolidation plans. Federal student loans may offer income-based repayment plans4, which may be attractive as they cap loan payments at a manageable proportion of your income. Finally, ask a qualified financial advisor at your financial institution for advice on how to get back on track with your loans. Though people generally don’t view their financial institution as a helping hand when it comes to dealing with debt issues, some – such as Affinity – offer guidance and reassurance through our Financial Wellness and Education initiatives.

As challenging as the COVID-19 crisis is for so many of us, have hope that you’ll get through it – and your finances will recover. Until then, Affinity is here to help you manage your loans so that your loan balances continue to go down, rather than up. 

For additional information and updates from Affinity about COVID-19, please visit https://www.affinityfcu.com/banking/we're-here-for-you.aspx

                                                   

This information is for informational purposes only and is intended to provide general guidance and does not constitute legal, tax, or financial advice. Each person’s circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments regarding the matters related to your condition are made.  

1 Retrieved from https://time.com/5662626/student-loans-repayment/

2 Retrieved from https://www.housingwire.com/articles/u-s-mortgage-debt-hits-a-record-15-8-trillion/

3 Retrieved from https://www.lendingtree.com/auto/debt-statistics/

4 Retrieved from https://studentloanhero.com/featured/income-based-repayment-plan/