How to manage your personal loans more effectively
Updated October 16, 2024, 2:46 AM EDT
Personal loans can be helpful for covering a large planned expense, such as a home renovation, or an unexpected financial emergency that may come your way. Navigating the personal loan application process and getting approved is the first step. The second is creating a strategy for repaying what you've borrowed.
5 tips to help you manage personal loans more efficiently
Here are five tips that can help managing personal loans easier.
- Budget for your monthly payments
- Keep an eye out for refinancing opportunities
- Set your payment schedule
- Automate to avoid late payment fees
- Watch out for prepayment penalties
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1. Budget for your monthly payments
Budgeting can go a long way toward successfully managing personal loans. A good time to create a budget is before you actually apply for a personal loan. This way, you have an idea of how much you can afford in the way of monthly payments.
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When you already have a personal loan, you can still use budgeting to your advantage. Review your current expenses to see how much you have leftover each month. Then add your personal loan monthly payments to that amount.
If your monthly loan payments would put you in the red, that's a sign that you'll need to reduce spending in other areas to stay under budget. If you still have room in your budget, you can then decide whether you want to apply that extra money to your loan, send it to savings, or use it to fund other financial goals.
2. Keep an eye out for refinancing opportunities
Refinancing your personal loan could make sense if it allows you to get a lower interest rate. Reducing your loan rate can save you money on interest and it could also reduce your monthly payments, which can make budgeting easier.
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3. Set your payment schedule
Some personal loan lenders may assign you a specific due date for making monthly payments. Others may let you choose your loan payment date.
If you have the option to choose your due date, consider what works best for your budget. If most of your bigger bills are due around the first of the month, for example, you may want to schedule your loan payments to be due toward the middle of the month.
Being able to pick your due date gives you some flexibility. But if your lender doesn't offer that, you may need to go back to your budget to figure out how to best allocate your paychecks to cover your payments.
4. Automate to avoid late payment fees
Automating payments to your personal loans is convenient and it can also save you money. Putting payments on autopilot means you don't have to worry about paying on time or triggering late payment fees. You also don't run the risk of causing credit score damage by having a late payment on your credit history.
Making monthly payments to personal loans automatically can also yield another benefit if you're able to get an interest rate discount. Some personal loan lenders offer an interest rate reduction for enrolling in autopay. That could make a significant difference in the total interest you pay over the life of the loan.
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5. Watch out for prepayment penalties
If you've committed to budgeting it's possible that you may be able to pay your personal loans off early. Prepayment can save you money in interest over the life of the loan, but it's important to know whether you'll be penalized for it.
Some personal loan lenders charge prepayment penalties for paying loans off early. This penalty is designed to help the lender make up for interest payments they won't get to collect. Before paying off your loans for good, read the fine print on your loan paperwork to see if any prepayment penalty applies.
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Research personal loans carefully
If you're considering a personal loan for debt consolidation or any other loan purpose, start with the basics. Compare the loan amounts you could borrow, the interest rates and fees offered by different loan lenders. Also, think about whether it makes sense to apply for secured loans or unsecured loans, based on your credit history.