Calculating your monthly expenses can become confusing if you have multiple financial responsibilities to accommodate, especially if your loan and credit repayments all have different repayment terms. While you may experience a small fluctuation in your priority bills, your credit repayments can vary massively and some months it might be difficult to meet all of your commitments in full. Minimum payments can offer some refuge here, and it’s one of the reasons lines of credit tend to be popular. However, paying only the minimum payment each month might not be as good for your finances as you initially think.
There are two main ways that lenders might expect you to repay your borrowing. These usually include: monthly repayments over a fixed term period or minimum payments over an open-ended agreement.
Fixed term loans are fairly self-explanatory: you borrow a loan over an agreed and specified length of time. Depending on the type of loan, the loan period can vary from one month, like with instant payday loans, and up to 35 years, like with mortgages. The monthly repayments also tend to be fixed, so you know how much you are due to repay each month before you’ve even signed the agreement. While the repayment amounts might vary slightly, you know in advance and can adjust your budget accordingly.
Two examples of a line of credit include credit cards and credit lines. To stay within the terms of these agreements, you usually have to make at least a minimum payment each month. This means you have a better chance of meeting your monthly commitments even if something goes wrong, as the minimum payment is only a small portion of the total balance.
Making only the minimum payment each month means it will take you longer to repay your balance. If you have a 0% interest rate credit card, it won’t cost you any more to repay only by minimum payments, as long as you repay the balance in full before the 0% interest rate term finishes. If your interest rate is more than 0%, and you don’t repay your balance in full each month, then you will be charged interest on your borrowing. The longer it takes you to repay the balance, the more interest will accrue, meaning the total amount you repay will be higher.
Different lenders’ minimum payments will be made up of different things. At Polar Credit, your minimum payment includes:
If you repay your balance in full, and don’t withdraw any further credit from your cash credit line during the next statement period, your minimum payment would be £0. As with most lines of credit, you are only charged for your borrowing, which means if you have a credit limit of £500, but you only use £50, interest will only accrue on the £50 you have withdrawn.
While some months it may be tricky, you should try to pay more than your minimum payment if you can afford to. Not only will you reduce your balance more quickly and reduce the amount of interest that will accrue, but you will also increase your available credit for future financial mishaps.
If you are making a large purchase using a line of credit, you may want to adjust your budget in advance to actively make larger repayments each month. Then, if you struggle one month, you have the option of paying just the minimum payment that month. If you budget for only the minimum payment, you run the risk of missing the payment if you experience cashflow issues in another area of your budget.
Minimum payments offer flexibility and can make managing your finances easier. Although they are all you have to repay each month to stay within the terms of your agreement, you should always aim to repay your balance in full as soon as possible, as outstanding credit can affect your credit file and your ability to obtain new credit services in the future.
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