You may need a personal loan to help cover wedding or adoption costs, or you may need to borrow money to cover an emergency or consolidate your debt. Regardless of the reason, make sure you know how to manage this new expense once you have it.
Key Takeaways
- Set calendar reminders and autopay to make sure you never miss a payment.
- Update your budget to reflect the new addition, and make any necessary changes to other payments to ensure you can pay off your personal loan.
- If you have the means, pay a little more each month or make an extra payment on your loan to pay it off a little early.
1. Create a Budget
A new personal loan means a new monthly expense. Making space in your budget for your personal loan payments means you may have to move some things around.
You may want to consider creating a personal spending plan. Determine your current expenses and try to minimize or eliminate those that are flexible or unnecessary. This includes things like subscription services, dining out, etc.
2. Set Up Autopay
After you’ve been approved for your personal loan and the funds have been distributed to your account, you’ll get a notice about when your first payment is due. At this point, you can set up autopay on your account.
Autopay ensures that you’re paying at least the minimum amount on your loan every month and that you don’t fall behind on payments. Some lenders offer an autopay discount, where you can get a percentage off your interest rate when you set up a bank account from which to automatically deduct the loan payment every month.
If you don’t want to set up autopay, then at least make sure you have a calendar reminder in place to notify you of the next upcoming due date.
3. Pay Extra if Possible
If you recently got a raise, bonus, or otherwise came into some additional cash, you can use that money to make an extra payment on your personal loan.
While it’s not required, getting ahead on your personal loan payments means you’ll pay less interest overall. Many personal loan lenders don’t have a prepayment penalty, so the sooner you pay off your personal loan, the more you’ll save in the long run.
4. Refinance if Possible
If you had to take out a loan and didn’t get the lowest interest rate offered, you might be paying more than you’re comfortable with right now.
After a few months of on-time payments and possibly paying off other outstanding debt, your credit score might have gone up. This means you can look into refinancing your personal loan to lower your interest rate and monthly payments. In some cases, you can secure a new, longer term, which can also lower your monthly payments, thereby making them more manageable for your budget.
Before you refinance, make sure to shop around and compare as many offers as possible first. Some lenders might charge you a higher rate than what you’re paying now, which would defeat the purpose of refinancing. If you can’t get a lower interest rate than what you’re paying now, it might not yet be worth refinancing.
Also, take into consideration the fees involved with refinancing. If a new loan will charge an origination fee, make sure it will not be more than you'll save in interest.
5. Read the Fine Print
A personal loan can come with a lot of caveats. Since there’s no minimum standard for personal loans, each lender has their own requirements for borrowers to meet.
If you’re struggling to make payments, talk to your lender about your options. See if you qualify for a hardship relief. Depending on your circ*mstances, you might be eligible for forbearance, or a short period where you can miss payments without damaging your credit score or repayment terms.
How Do People Use Personal Loans?
Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.
Is It Best to Pay Off a Personal Loan Early?
In most cases, paying off a personal loan as soon as you can is a good idea. However, keep in mind that some lenders might have a prepayment penalty, or a charge if you pay off your loan too soon.
How Can I Lower My Monthly Payment on My Personal Loan?
You can lower your personal loan monthly payments by securing a lower interest rate or extended repayment terms through refinancing. The lower your interest rate, the less you’ll pay on top of what you borrowed, and the longer your repayment terms, the lower your monthly payments will be due to them being spread out over a longer period of time.
What Is the Risk of a Personal Loan?
Personal loans are typically unsecured, which means that you don’t need to put up collateral or assets to secure your loan. If you fail to make payments on your personal loan, you run the risk of going into default. This would mean that the entire balance of your loan would be due at once and your credit score significantly drops, which would hurt your chances of borrowing in the future. Only take out a personal loan if you can afford the monthly payments.
The Bottom Line
Personal loans are helpful for anyone who needs to borrow money to cover expenses as soon as possible. But personal loans are still a debt that you need to repay. By managing your personal loan correctly, you can minimize the risk of falling behind on payments and hurting your chances of borrowing down the road.
