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Taking out a personal loan can get you the funds needed to achieve your goals or tide you through a rough time. But getting the money is just the first step – one that most lenders try to make pretty painless. After all, they’re just in it for the money.
Once the money hits your bank account, though, it’s up to you to spend and manage it wisely. If you’re caught unprepared, this process can be a bit more involved than actually applying for the loan in the first place. So, whether you’re new to credit or just trying to get your finances back on track, here’s how to manage your personal loan.
How to Manage Your Personal Loan (Step-by-Step)
#1. Create a Realistic Budget
The first step in responsible loan management is creating a budget or fitting it into your existing one. Worst-case scenario, you step into a new loan without understanding the impact it will have on your finances. Remember: just because a lender says you qualify for a loan doesn’t mean you can easily afford it.
But even if you missed this step before applying, it’s not too late to manage the situation now. You can alleviate the pressure loan repayments put on your finances by crafting a budget that tracks every incoming and outgoing dollar. With a clear view of your situation, you can adjust your expenses to make room for your new loan.
That said, budgeting doesn’t come naturally to everyone. If you struggle with keeping your finances organized, a budgeting app can do the nitpicky work for you.
>> More: How to Refinance a Personal Loan
#2. Set Up Automatic Payments
Depending on your personal loan lender’s policies, they may assign you a due date or let you choose your own. But either way, the best way to ensure you’re never late – and avoid the resulting financial and credit consequences – is to set up automatic payments.
Automating your payments is not only convenient, but as long as your bank account is well-funded, you’ll never miss a due date. And many lenders offer autopay rate discounts (usually under 0.5%), which can add up to big savings over time.
#3. Consider Paying More than the Minimum Monthly Payment
Making more than your monthly minimum payment keeps you ahead on your loan and reduces your loan term. Every dollar you repay now is another dollar you don’t have to pay interest on later. Plus, financial discipline looks great to other lenders if you need new credit anytime soon.
#4. Consolidate Your Debt
If you’re managing multiple loans or lines of credit, consider consolidating your debts into just one or two loans. Wrapping all your debts into one manageable package can make organizing your monthly obligations easier. And if you qualify for a lower interest rate, you may even save money in the long run.
>> More: Best Debt Consolidation Loans
#5. Keep Your Eye Out for Refinancing Opportunities
Refinancing your personal loan allows you to score a better interest rate or loan term. Generally, refinancing makes the most sense if your credit score has increased or when interest rates drop in general. However, you can also refinance to a longer-term if you need some wiggle room in your budget now.
Before you refinance, be sure to do the math and see how much you stand to save long-term. Don’t forget to factor in any applicable prepayment penalties or origination fees. And if you’re changing the size of your monthly payments, be sure to factor that into your budget!
#6. Circle Back to the Fine Print
When you’re approaching your final loan payment, it’s tempting to sprint for the finish line. But paying off your loan quickly may not be worth the peace of mind if you incur a hefty prepayment penalty.
While they’re less common in personal loans, your contract’s fine print should outline any potential penalties. If the penalty is less than the interest you’d pay on the loan, you may still save a few bucks.
>> More: Are Personal Loans Taxable?
#7. Monitor Your Credit Score Each Month
Your credit score is a major player in your ability to qualify for low-interest debt from reputable lenders. Many landlords and employers also use your credit score to gauge your responsibility and trustworthiness. When you take out a loan, it’s wise to monitor your credit monthly and ensure everything is on the up-and-up.
If all goes well, your credit score should rise over the life of your loan. But if you experience a sudden drop, you may have missed a payment – or something hinky may be going on. At that point, it’s time to check in with your lender or pull a copy of your credit report to investigate.
What Is the Best Way to Pay a Personal Loan?
When possible, the best way to pay off your personal loan is ASAP. If you’re not sure how to get ahead on your loan schedule, consider:
- Putting any extra cash toward your loan
- Paying on a biweekly schedule to make an “extra” payment annually (26 half-payments per year = 13 full payments)
- Rounding up your monthly payment to the nearest $25, $50, or even $100 to shorten your loan term
- Giving yourself the gift of a holiday debt payment around Christmas or your birthday
Ultimately, the faster you shed your debt, the less interest you’ll pay, and the quicker you’ll free up your monthly income.
Can I Cancel a Personal Loan?
Some lenders let you return lent funds shortly after approval without penalty. But if you’ve already spent the funds or begun making payments, it’s probably too late to “cancel.”
Instead, you can repay the loan as fast as possible with your borrowed funds or out of your regular income. And if you’re struggling to make your payments, reach out to the lender to ask about payment deferrals or a loan modification.
Can I Repay a Personal Loan Early?
You can repay your personal loans early – but whether or not you should depends on your situation and the lender’s policies.
Some lenders charge prepayment penalties for paying your loan off early, negating your interest savings. However, many don’t.
But either way, shedding your loan can free up your monthly income and lift the burden of debt hanging over your head.
Is It Safe to Setup Automatic Payments on My Personal Loan?
Assuming a reputable lender, autopay is safe – usually more so than sending account information through the mail. Not to mention, it’s convenient and can help you avoid missed payments.
Bottom Line: How to Manage Your Personal Loans
Once you get organized, managing your personal loan is a piece of cake. If you plan ahead and make extra payments, proper loan management can even knock some time off your loan term. And at the end of the day, financial discipline is a valuable skill – not to mention a great way to impress future lenders.