While borrowers will know how they intend to repay a loan upon making an application and receiving the funds, personal and financial circumstances can easily change over the course of a loan period. How can borrowers have contingencies in place to ensure they can continue to repay their loan?
It is a good idea to have three to six months’ of repayments saved as a contingency. This allows for a range of personal changes including a change or loss of job, taking time off due to illness, and any reduction in income, for whatever reason. If a loan has a variable interest rate the repayment amount could also change across a loan period.
Without contingencies in place, borrowers may begin to miss payments and see their credit history negatively affected. Borrowers should ensure they will still be able to repay their loan in the event of their personal circumstances changing, though lenders are also obliged to ensure they provide credit responsibly.
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