Taking out a personal loan has never been as easy as it is today. There are plenty of banks, credit unions, and even a wide variety of online lenders ready to help get you the loan you need in less than 24 hours. They can be one of the best ways to get fast funding to consolidate debt, fund an upcoming vacation, or pay for some other expenses.
Basically, personal loans can be a great tool to relieve your financial burdens as long as they’re managed responsibly. But what does it mean to manage personal loan payments responsibly?
In this article, we’ll review how you can stay on top of your personal loan payments so you will feel in full control of your loan.
Tip 1: Set a Budget
Establishing a budget for yourself is incredibly important for your financial well-being, whether you have loan payments to make or not. Managing any kind of debt or financial obligation becomes so much easier when you know where all of your money is going.
Not having a clear budget defined when managing a personal loan will indubitably cause stress and confusion, since you aren’t fully aware where your money is going or how much of it you have in your bank account.
The best way to get started when establishing a budget is to categorize your expenses. For example, you can have categories that look like this: Groceries, Going Out, Shopping, Home, Debt. So “Home”, for example, might include things like monthly mortgage payments, HOA fees, utilities, and so on. The “Debt” category would include other forms of debt, such as your monthly student loan payments or even your personal loan payments.
This just helps organize where your money is going. A great way to keep track of everything is to use a mobile app that helps you better visualize and track your monthly expenses.
Tip 2: Set a Reminder
Once you have a budget established, it’ll be much easier to make your payments on time. Keep in mind that doing so won’t only keep your payments on track and help relieve stress, but making payments on time (every time) can also have a positive impact on your credit score. If you’ve taken out loans before, then you’re probably aware of how big of a role your credit score and history will play when it comes to your finances, especially taking out personal loans.
Conversely, not making payments on time can hurt your credit score. It can also incur late fees or penalties from your personal loan provider.
The easiest way to stay on top of upcoming personal loan payments is by setting up automatic monthly payments - if your personal loan provider offers it. If not, you can also set a payment reminder alert through your online banking, a mobile app, or by adding the alerts to your calendar.
Tip 3: Consolidate
If you’re working on paying down multiple personal loans, consider debt consolidation. This financial strategy is where you take out a single loan to pay off all other smaller loans. You’re essentially rolling all of your debt into one, neat and manageable debt source.
Debt consolidation is popular because it simplifies debt repayment so that you only have to worry about making monthly payments to one lender instead of several. It’s especially useful if you can secure a lower interest rate than what you were paying on your other debt sources. This can save you money in the long-run, so make sure you compare interest rates with several lenders. Don’t make the mistake of taking out a debt consolidation loan that has a higher interest rate than what you’re already paying. You’ll just be paying more in the end.
Tip 4: Pay More than the Minimum
If you have a little extra cash on hand, it’s a good idea to pay more than just the bare minimum of your monthly personal loan payments. This strategy of paying more than what’s due each month will reduce the lifespan of your loan’s payment plan which will help bring you to the end of one source of debt sooner.
Another financial perk of paying off your personal loan sooner is that you’ll end up paying less in interest which saves you money in the long term. Just keep in mind that some personal loan lenders won’t be too happy about losing out on that interest you would have paid had you stuck to the original repayment plan, and might charge a prepayment penalty. This fee could vary and not all lenders will charge you with it if you pay off your loan early, so be sure to check the terms of your loan agreement.
Finally, paying off your personal loan could lead to an improvement in your credit score since it will reduce your debt-to-income ratio. You can figure out what your debt-to-income ratio is by dividing your total monthly debt amount by your gross monthly income. It’s one factor lenders consider when determining your creditworthiness.
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When it comes to managing personal loan payments, start implementing these tips to make the process simple and easy so you aren’t overcome with stress. If you’re managing payments for multiple personal loans, consider debt consolidation so you only have to manage one personal loan repayment.
Establish a budget to help you clearly see where your money is going each month, set calendar reminders or payment alerts to stay on top of your monthly dues, and try paying more than the minimum amount on your repayments so that you can save money on interest.
Remember, how well or how poorly you manage your personal loans will be reflected in things like your credit history and can affect your overall credit score, so it’s worthwhile to do everything you can to manage them well.
Personal loans can be a great way to relieve your financial burdens as long as you manage them smartly and don’t fall behind.