How to Manage Your Personal Loan

You got the loan — now make a plan to successfully pay it off. Start by adjusting your budget to cover payments.
Jan 7, 2022
How to Manage Your Personal Loan Payments-story

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From pre-qualification to getting funded, taking out a personal loan is typically pretty painless, with many lenders offering slick online applications and same-day funding.

How to manage a personal loan, though, requires  understanding of how the monthly payments change your budget and a clear plan to pay off the loan.

Here are five things you can do to make your personal loan easier to manage.

1. Build your budget

The first step to making mindful loan payments each month is knowing what you’ll have left after you make them. Ideally, you would do this before applying for a loan, says Rhode Island-based financial planner Greg Young with Ahead Full Wealth Management.

The worst-case scenario is that you got a loan without a clear picture of the impact it would have on your monthly expenses, causing you to take on more debt to make up for it.

“Even if you’re doing a credit card consolidation loan [and] the only reason you got a consolidation loan is to have one payment, it still makes sense to gauge the impact on your budget,” Young says.

Some people maintain a spreadsheet or other system to track their spending, while others prefer a budgeting app or savings tool.

NerdWallet recommends the simple 50/30/20 budgeting plan, in which you spend 50% of your earnings on necessities, no more than 30% on things you want and 20% on debt repayment and savings.

Some budgeting apps let you enter how much you want to spend on different things and may alert you when you’re reaching the limit.

Know where every dollar goes
Find ways to spend more on the things you love, and less on the things you don’t.

2. Decide where to put the money

Unless you’re consolidating debt and sending the money directly to your credit card issuers, it’s best to keep the money in a checking account if you want easy access to it.

Withdrawing from a checking account is easiest because there are no tax implications, like there may be with a brokerage account, or withdrawal limits that a high-yield savings account would have.

Whether you should have 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.

It can be psychological, says Tess Downing, a San Antonio-based financial planner. For some people, it’s just easier to see large payments come out of an account they don’t also use to buy groceries.

When Downing took a home equity loan to build a pool at her home, she says she kept the loan money in a separate bank account so when the first payment came due — 25% of the project’s cost, Downing says — her everyday checking account didn’t take the hit.

It comes down to your preference, she says, “and maybe just your own discipline.”

3. Simplify your payments

Many lenders offer rate discounts between 0.25 and 0.5 percentage points to borrowers who set up automatic payments, which can drop monthly 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 the payment an effortless part of paying your monthly bills.

Another way to simplify your repayment plan after several months with your current loan is to roll multiple sources of debt together with a balance-transfer credit card or debt consolidation loan. Consolidation puts all of your debts together under one monthly payment at one interest rate.

Consolidating only makes sense if you can get an interest rate that’s lower than the combined rates on your existing debts.

4. Watch for refinance opportunities

If you’ve set up automatic payments and are sure you’ve gotten the lowest rate on a personal loan, it’s possible you’ll still find a diamond-in-the-rough refinance opportunity.

Because of the short terms on unsecured loans, Downing says she doesn’t get a lot of inquiries about refinancing them, but there are times when it’s beneficial.

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.

“It doesn’t hurt to be prudent,” Young says. “If you can lower your payment or your interest rate, that makes sense.”

5. Read the fine print before paying it off early

When you're near your final installment, it can be tempting to kick your payments into high gear and pay the loan off quickly, but Young recommends weighing the amount you’ll save by paying it off early against the potential good it could do elsewhere.

“If you have the cash and the capacity to pay off your loan early, [ask yourself] ‘can I leverage those dollars to increase the quality of life or my revenue somewhere else instead of this loan,’” Young says.

For example, if your personal loan has a 5% interest rate and you have a Roth IRA that earns 7%, you might consider dedicating extra money to the IRA, where it can work harder.

Prepayment fees are rare in personal loans, but it’s a good idea to review your loan contract before you pay it off to avoid a surprise. 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

Yes, most lenders let you repay a personal loan at any time. Fees for paying your loan off early, also called prepayment fees, are rare in personal loans, but it’s still a good idea to check the loan contract to avoid a surprise fee.

Before you pay the loan off, review your budget and progress toward other financial goals to be sure it’s the best choice.

Some lenders let you return the personal loan funds shortly after approval, interest-free. It’s probably too late to “cancel” the personal loan if you’ve already started to repay it, but you can return unused funds in a lump-sum payment. By this time, you may owe some interest.

If you’ve used the funds and are struggling to make payments, reach out to the lender. Some lenders have hardship programs that let you defer a payment. A lender may also offer to restructure your loan to make the payments more manageable.

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