From pre-qualifying to getting funded, taking out a personal loan can be pretty painless. Many lenders offer smooth online applications and same-day funding.
Managing a personal loan successfully, however, requires understanding how the payments change your monthly budget and creating a clear plan to pay off the loan.
Here are some things you can do to make your personal loan easier to manage.
Build your budget
You want a clear picture of how your loan payment impacts your monthly cash flow. Take a look at your budget to get that insight.
Some people use a budgeting app to track their spending, while others prefer a spreadsheet or another money-tracking system. What’s important is to choose a budgeting plan that fits your financial priorities and is simple enough to stick to.
Know where every dollar goes
Find ways to spend more on the things you love, and less on the things you don’t.
Set up automatic payments
If you’re consolidating credit card debt, some lenders will give you the option to send money directly to your credit card issuers. Otherwise, keeping the loan funds in a checking account is best for easy access.
Whether you should keep the money in a separate checking account depends on when you plan to spend it and how easily you can mentally divvy up the balance between what you can and can't spend.
Setting up autopay makes managing your personal loan payments easier. Many lenders offer rate discounts between 0.25 and 0.5 percentage points to borrowers who set up automatic payments, which can drop payments by a few dollars each month.
Perhaps more importantly, automatic payments help you avoid missed payments — which often result in late fees — and make paying your monthly bills effortless.
» MORE: Find the best checking account
Communicate with your lender
Even if you fully intended to pay off your loan, sometimes life throws an unexpected snag your way. You may be tempted to hide from your lender if you can’t afford a loan payment, but it’s usually in your best interest to contact them as soon as possible.
Many lenders offer hardship programs, like personal loan deferment, for borrowers who are struggling because of factors like a job loss, illness or death in the family. Depending on your lender, you may be able to delay or reduce payments, or even forgive part of your principal in rare situations.
If your lender agrees to deferment, your credit score shouldn’t be impacted while your payments are on pause. But lenders won’t automatically provide you with relief programs, so you’ll want to reach out immediately if you run into trouble.
Be strategic about extra payments
Finding extra money in your budget to put toward debt repayment is typically a win, but don’t automatically throw excess funds toward your personal loan payments.
Before making additional payments, think about your debt payoff strategy. Two common approaches are the debt avalanche method (where you focus on your debt with the highest interest rate) and the debt snowball method (where you focus on paying off your smallest debt first, then work your way up toward larger debts).
If you decide that extra personal loan payments align with your plan to get out of debt, ask your lender what you need to do to ensure the additional money goes toward your loan principal only. Otherwise, some lenders will automatically apply the extra funds toward your next payment, which wouldn’t save you money.
Watch for refinancing opportunities
If your credit score or debt-to-income ratio improves at some point during your repayment term, there may be opportunities to refinance the loan at a lower rate.
For example, if you’ve been making on-time payments toward a loan for a while and your credit score has improved, you might qualify for a lower rate, which can save money on interest.
Refinancing involves taking out another loan to replace your current one, so make sure the savings outweigh the costs. If your new loan extends your repayment period, for instance, you could wind up paying more interest over time.
» MORE: How to refinance a personal loan
Weigh the pros and cons of paying the loan off early
As you near your final payments, it can be tempting to pay the loan off quickly, but take a moment to weigh the pros and cons. While it may feel satisfying to get rid of your debt, wiping out your savings to do so could put you in a worse position. Consider whether the money you’d use to pay off your debt early could be better used in another way.
Prepayment fees are rare in personal loans, but it’s a good idea to review your loan contract if you’re thinking of paying off your loan early. If your loan comes with this fee, consider whether the amount of interest you would accrue by waiting for the end of the loan’s term is higher than the amount the prepayment fee would cost.
Frequently Asked Questions
What is the smartest way to pay off loans?
Two smart ways to pay off loans and other debts are the debt avalanche method and debt snowball method. With the avalanche method, you put any extra payments toward your debt with the higher interest rate, then repeat with the balance that has the next-highest interest rate until you’ve paid off your debt. The snowball method focuses your surplus funds on the smallest bill, then you work your way up until you’ve paid off your largest debt.
Is it worth paying off a personal loan early?
Paying off a personal loan early could be worth it because you’ll save money on interest, but it may not be the best choice if you have debts with higher APRs.
How can you get out of a personal loan you can’t afford?
If you can’t afford your personal loan, contact your lender and ask if they offer relief programs that let you reduce or skip payments. You could also seek nonprofit credit counseling to help determine how to manage your debt in the long term.
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