Using Loans Wisely as a Single Parent
This post offers advice to single parents on when and how to use loans wisely, covering various situations where loans might be beneficial, steps to assess financial viability, and strategies for loan repayment.
When you’re a single parent, affording the cost of living can be stressful and lonely. Living on one income means your budget is more limited, giving you less financial flexibility and making saving more difficult. Childcare costs can eat up your budget and jobs that offer flexibility can be limited.
So, what’s a parent to do? If you’ve wondered about taking a loan to get ahead or to help manage unexpected costs, here’s what to think about.
When to Consider Borrowing
For some life situations, taking a loan creates opportunity, such as buying a house or investing in education, while other times, people take a loan to get a handle on their debts. The question to ask yourself: will a loan and its associated payment actually help you, or will it mean you’re kicking the can down the road and creating a bigger debt headache later?
Here are a few situations for which you might consider a loan.
If you’re going back to school to improve your career prospects or if your child needs help affording college, taking a federal student loan is a no-brainer in most cases. Investing in education can lead to higher-income careers and greater lifetime earnings.
However, in the case of helping your teen, be aware that large Parent PLUS loans or co-signing large private student loans can become burdensome to you both. Research your options thoroughly beforehand.
If you’re planning to buy a new or new-to-you car, considering a car loan could be a practical financial move. Investing in a reliable mode of transportation is often a necessity for single parents, as it can significantly impact your daily life, from commuting to work to fulfilling family responsibilities.
Taking a mortgage to purchase a home is typically the only way an individual can afford a home. Today’s interest rates are higher, but different kinds of loan programs can put home ownership within reach.
Facing a divorce or a custody battle can be an emotionally and financially challenging experience, especially for single parents. In such situations, obtaining a short-term loan to cover legal expenses can be a practical and strategic decision.
If you need to relocate for better job opportunities or to be closer to family support, a loan may be needed to help cover moving expenses and initial set-up costs associated with the move.
Unforeseen emergencies, like medical bills, urgent home repairs, or car repairs can require taking out a short-term loan if you can’t cover the costs with credit or savings.
If you’re struggling with high-interest debt, such as credit card debt, consolidating multiple debts into a single loan with a lower interest rate might help reduce overall interest payments and simplify debt management.
They might be a good choice for a certain situation, but it’s also important to understand the nature of how they work.
"The reality is they just shift [debt] from one [place] to another,” said MMI client Ilia Mack during her appearance on the Long Story $hort podcast. A consolidation loan without a plan to manage the new debt may just be trading one problem for another.
How to Prepare for a Loan
If taking a loan seems like the next best step, explore your finances and your ability to make a loan payment to figure out if it’s the best option for you. Three steps to take:
1. Determine your needs
Identify the specific expense or purpose for which you need the loan (for example, emergency, education, home repair). Estimate the loan amount you require and how it fits into your overall financial picture.
2. Evaluate your financial situation
Review income, expenses, and debts. Try to determine what kind of loan payment you can afford based on your other expenses. Make sure that you can comfortably cover the monthly payments without sacrificing essential expenses.
3. Review your loan options
Research different types of loans available to you, and make sure you understand their interest rates, terms, and repayment schedules. Compare lenders to find the most favorable loan terms, and consider whether you qualify for any low-interest or government-backed loan programs.
4. Adjust your budget
Be prepared to subtract from your budget where needed. When adding a new expense or payment, you’ll typically need to reduce spending in another category. For the sake of simplicity, it may be easiest to identify specific expenses you’ll reduce by a determined amount until the loan has been repaid. For example, if your weekly grocery bill averages $200, try to drop it to $175 until the loan is repaid, or cancel certain subscription services to divert that money to the payment.
Loan Repayment Strategies for Single Parents
Every loan comes with its own terms, and you generally won’t have many different payment plans to choose from. But using these strategies will help you cover the monthly payment.
Create a flexible budget
Income can sometimes vary month-to-month and some seasons have higher associated expenses, like the holiday season, so focus on covering essential expenses first and then stash any extra income during the months when you have cash-flow flexibility so you can put it toward debt repayment during the tighter months.
Prioritize building an emergency fund
If you’re able to build an emergency fund, you can draw on it to cover essential expenses during months when income is lower than expected. This financial cushion helps prevent falling behind on loan payments.
Explore payment plans for student loans
If you’re in the repayment phase, explore switching to the most affordable income-driven repayment plan if it serves you better than the standard 10-year repayment plan. Parent PLUS loans don’t qualify for the same IDR plans, but you can still explore other strategies for paying these loans off.
Use windfalls to make payments
When you receive one-time windfalls, such as tax refunds or bonuses, consider allocating a portion toward loan repayment. That helps you make faster progress on squashing your debt.
Ask about interest-only payments
In some cases, lenders may allow you to make interest-only payments during months when income is low. Paying just the interest can help you avoid falling into delinquency while keeping the loan balance from growing substantially. However, it will lengthen the amount of time you’re repaying your loan, so it shouldn’t be a first resort.
If you’re interested in consolidating your debts but you don’t qualify for a debt consolidation loan – that was our podcast guest Ilia Mack’s situation – MMI offers a debt management plan. These plans consolidate your debts into a single affordable payment without a loan or credit check. Give us a call if you’d like to discuss your options.