From pre-qualification to getting funded, taking out a personal loan is typically pretty painless, with lenders offering slick online applications and same-day funding.
How to manage your personal loan payments, though, can be less clear.
Some lenders offer mobile apps and customer service representatives to help, but there aren’t a lot of instructions for what to do with the money once you have it.
Personal loans are like any other debt: You should have an 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 payments easier:
- Build your budget.
- Decide where to put your money.
- Simplify your payments.
- Watch for refinance opportunities.
- Read the fine print before paying off the loan.
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. Then, you’d need 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.
Even if…the only reason you got a consolidation loan is to have one payment, it still makes sense to gauge the impact on your budget.
Budgeting apps and savings tools are quickly gaining popularity, but some people maintain a spreadsheet or another system to track their spending.
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.
You can pay your bills with some budgeting apps, while others let you enter how much you want to spend on different things and alert you when you’re reaching the limit.
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.
Money is harder to withdraw from a brokerage or high-yield savings account. Plus, it’s unlikely that the interest you earn on either of those accounts would make up enough of the loan’s interest rate to be worth it, Young says.
Whether you should have the money in a separate checking account depends on how easily you can mentally divvy up the balance between what you can and can’t spend.
» MORE: Find the best checking account
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 around 0.25% to borrowers who set up automatic payments, which can drop your 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.
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. It’s also best for those with good credit (generally, a FICO score of 690 to 719) whose debt-to-income ratio isn’t above 40%.
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, Young says, if the Federal Reserve drops interest rates, your loan could have a higher APR than current rates.
Likewise, 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,” he says. “If you can lower your payment or your interest rate, that makes sense.”
» MORE: How to refinance a personal loan
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 making your regular payments and dedicating that extra money to the IRA, where it can work harder.
You should also watch for prepayment penalties, which are fees that some lenders charge when you pay off a 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.