How to distribute your earnings to pay loans

Some loans are more important than others, ensure you allocate your money effectively

Financing is one of the major factors affecting every household across Australia. Whether you earn more than enough, just enough, or not enough, working out how you are going to spend and save your money takes a lot of consideration and progressive planning. As the cost of living continues to increase, it becomes harder to save money to purchase necessary assets, which is why the amount of people taking loans is also increasing. The majority of people are uninformed when it comes to what types of loans are necessary and how you should distribute your money in order to pay off your loans comfortably. Check out our guide to basic loan expenditure.

Car financing

Your car loan should be one of the lesser loan values on your debt list. Financial experts from ‘Consumer Reports’, suggest that your entire monthly debt should not exceed 36% of your gross earnings for the month. As a rule of thumb for deciding how much to spend on a car, follow this calculation:

  1. Calculate 36% of your gross monthly income (or 18% of fortnightly payments).
  2. Create a detailed list of all your current monthly debts and total the amount. Remember to include everything from your home loan or rent to credit card bills and other various instalment loans.
  3. Subtract this calculated amount off the 36% figure.

What is left is what you can spend on smaller loans such as a car or extra luxury items such as boats or extra properties. If you really want that brand new sports car, then save more for a deposit, which would decrease your monthly repayment.

Boat or motorbike financing

If you feel like it is time to spoil yourself after working so hard, then a boat or motorbike loan may be next on your list. It is important to note that these loans are less important than necessities such as a home, student or car loan. Banks and financial institutions will be reluctant to lend money for extras when the basics are not in place, so these types of items should be last on your list. Remember, loans are available to help you achieve your life goals; ensure that your bigger, basic loans are almost paid off before you consider taking out a loan for luxury items.

Home financing

By bigger, basic loans, we mean home financing. Whether you are a first-time buyer, or a property investor, a home loan should be considered with the utmost care and imperturbability. A bank or financial institution will take the following factors into account when deciding how much money to lend for a home:

  1. Income
  2. Deposit
  3. Credit history
  4. Employment stability

Having said this, a home loan is not dependent on how much you think you can afford. It is seen as a high risk loan by lenders, which is why lenders have to go to great lengths to ensure that you are only approved for a loan that you can consistently afford to repay. A home loan will make up the majority of your debt; whether you are interested in a starter home or a mansion, it should equal approximately 25% of your income.

Commercial property financing

Financial lenders favour loans that generate an income; this adds value to the economy as well as the institution’s portfolio. As a seasoned business owner or beginner entrepreneur, you realise the value of having a financial establishment behind you and this is especially true when searching for a commercial property. The stability of your business should be taken into account when deciding on the budget for your property. You can follow the same rule of thumb for home financing; your commercial property loan should not exceed 25% of your business’s monthly turnover. With commercial property, it is important to consider hidden costs, such as legal fees, survey charges, appraisal charges, adjustable rate loans and application fees.

Personal financing

Depending on the amount you wish to lend, personal loans can be the hardest to attain. Most institutions require a reason for your personal loan. Financial establishments favour reasons that have long-term benefits such as study loans, weddings or debt consolidation. It will be harder for you to get a loan if you need it for unnecessary extras such as a yacht or a helicopter; unless your income allows it, that high-roller lifestyle will have to wait. Personal loans can be a small or large amount, anything from $2000 to $200 000. The larger your requested amount is, the harder it will be for you get it without a justifiable reason. Remember, the interest rate on a personal loan is much higher and should only be considered in case of emergency or urgency.

If you would like to live comfortably with everything you need, it is essential that you consult a loan expert who can provide accurate advice for any type of loan you require. Ensure that you compare quotes until you find the perfect loan that will suit your requirements and fit into your lifestyle.

Should you require more information about loans, financing or extended warranties, contact All Nation Finance.