How to manage your personal loan payments
From pre-qualification to obtaining financing, the subscription of a Personal loan is usually quite painless, with lenders offering smooth online applications and same day financing.
However, managing your personal loan payments can be less straightforward. Among the questions you might ask yourself: How will the payments impact my budget? What happens if I miss a payment?
Personal loans are like any other debt – you need to understand how monthly payments affect your budget and have a clear plan for paying off the loan.
Here are five things you can do to make your personal loan payments easier.
The first step in making conscientious loan repayments each month is knowing how much you’ll have left after you’ve made them. Ideally, you would do this before applying for a loan, says Greg Young, Rhode Island-based financial planner at Ahead Full Wealth Management.
In the worst case scenario, you got a loan without having a clear idea of the impact it would have on your monthly expenses. Then you will have to take on more debt to compensate.
“Even if you take out a credit card consolidation loan [and] the only reason you got a consolidation loan is to have one payment, it always makes sense to assess the impact on your budget, ”Young explains.
NerdWallet recommends the simple 50/30/20 budget plan, in which you spend 50% of your income on basic 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 allow you to enter the amount you want to spend on different things and notify you when you reach 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 your 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 to access it easily.
Money is more difficult to withdraw from a high yield brokerage or savings account. Plus, the interest you earn on any of these accounts is unlikely to be enough of the interest rate on the loan to be worth it, Young says.
Whether you should have the money in a separate checking account depends on how easily you can mentally divide the balance between what you can and cannot 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 coming out of an account that they don’t also use for groceries.
When Downing took out a home equity loan to build a swimming pool at her house, she says she kept the loan money in a separate bank account. So when the first payment is due – 25% of the cost of the project, according to Downing – his daily checking account doesn’t take the hit.
It depends on your preferences, she says, “and maybe just your own discipline.”
3. Simplify your payments
Many lenders offer rate discounts of around 0.25% to borrowers who set up automatic payments, which can lower 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 paying an effortless part of paying your monthly bills.
Another way to simplify your repayment plan after several months with your current loan is to consolidate multiple sources of debt with one balance transfer credit card Where debt consolidation loan. Consolidation consolidates all your debts into a single monthly payment at a single interest rate.
Consolidation only makes sense if you can get an interest rate lower than the combined rates of your existing debt. It’s also best for those with good credit (typically a FICO score of 690-719) whose debt-to-income ratio is no more than 40%.
4. Watch for refinancing opportunities
If you’ve set up automatic payments and are sure you’ve gotten the lowest rate on a personal loan, you may still find a rough diamond refinance opportunity.
Due to the short tenures of 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, according to Young, if the Federal Reserve lowers interest rates, your loan could have a higher APR than current rates.
Likewise, if you have been making on-time payments for a loan for a while and your credit rating has improved, you may qualify for a lower rate.
“It doesn’t hurt to be careful,” he said. “If you can lower your payment or your interest rate, that makes sense. “
5. Read the fine print before paying early
When you’re near your last payment, it can be tempting to kick your payments into high gear and pay off the loan quickly, but Young recommends weighing the amount you’ll save by paying it off early against the potential good it could. to do. somewhere else.
“If you have the cash flow and the ability to prepay your loan, [ask yourself] “Can I use these dollars to increase the quality of life or my income elsewhere instead of this loan?” Young says.
For example, if your personal loan has an interest rate of 5% and you have a Roth IRA which earns 7%, you might consider making your regular payments and devoting that extra money to the IRA, where it can work harder.
You should also watch out for prepayment penalties, which are fees some lenders charge when you prepay a loan. If your loan has these fees, determine if the amount of interest you will earn while waiting for the end of the loan term is more than the amount the prepayment fee would cost.