Was there ever a time in your life when you needed some extra cash for one thing or another? Maybe it was for some kind of major purchase like a house, or to pay for college tuition. Or maybe it was for something relatively minor, like a small emergency expense. When you find yourself in any of these situations, depending on your financial situation, applying for a personal loan might seem like the next step to getting the financial help you need.
Having said that, regardless of what your particular situation is and what kind of loan you ultimately end up applying for, it’s always essential that you have a clear idea of how to manage a personal loan. Why? Well, winging it when it comes to your finances can be a dangerous game, and taking on debt without a clear plan to pay it off can do some serious damage to your overall financial situation.
Now, this doesn’t mean that you should blindly avoid personal loans at all costs. It just means that it’s important that you arm yourself with the right information before making any impactful financial decisions. With that in mind, let’s walk through some of the most important aspects of personal loan management.
What is a Personal Loan?
In the most basic sense, a personal loan is money that you’re borrowing from a lender or a financial institution of some kind. One of the keys here is that it’s meant for some kind of personal use, and not for a business expense. There are different places that you can apply for a personal loan with, like credit unions, storefront lenders, banks, or online lenders.
In certain instances, when you get approved for a personal loan, interest is going to build up over the entire term of your loan. This means that if you’re able to pay off everything that you owe to the lender before the initially agreed-upon due date, you may be able to save some money. But this won’t always be the case depending on the lender, which is something we’ll touch on later.
In a lot of cases, interest isn’t the only charge you’ll need to pay. Things like origination fees, late fees, and more will also need to be taken into consideration.
How Do I Work my Personal Loan Payments Into my Budget?
One of the most important aspects of personal loan management is making sure you have a plan to pay off what you owe. The nature of your loan repayment can vary based on the type of loan you’re paying off. For example, with an installment loan, you’ll have a series of scheduled payments that you’ll need to make over a pre-determined period of time. With a personal line of credit, generally, there’ll be a fixed due date for which you will be required to make a minimum payment. This will be a portion of what you owe, and will keep your account in good standing. That being said, it’s always a good idea to pay more than your minimum payment, if you can, and pay off your account as soon as possible.
Regardless of what type of loan you’re paying off, you’ll need to make sure you stay on top of your payments. One of the best ways of doing this is to incorporate your loan payments into your budget.
But what if you don’t have a budget? Well, there’s always time to start one! There are a lot of frameworks you can follow, so you’ll need to spend some time finding something that works for your situation. To get you started, you can check out our ultimate budgeting guide for inspiration.
By seeing what it would look like if you had to incorporate your payments into your budget, you can get an idea of whether you even have room to take on a loan in the first place. If you don’t, you can try to find a way to cut back on some of your spending. Using a personal loan calculator can help you to get a sense of what a particular loan may cost you and whether or not you can afford to take this expense on.
What Should I do if There’s no Room in my Budget for Loan Payments?
One of the first things you’ll want to do before you apply for a loan is to research what your potential options may be and try to find something that could suit your situation. If, after spending some time assessing what might be available to you and what your financial situation is, you feel like you won’t be able to afford your potential loan payments, you should avoid applying for a loan at all.
Like we said, it might be a good idea to assess your budget, see what you’re spending your money on, and find some simple ways to reduce your spending. If you manage to make a little extra spending room and are facing an emergency expense, assess what potential emergency loans might be available. Just be certain that you know where you stand financially, and that you don’t jump into anything rashly.
Should I Automate my Loan Payments?
Not only is it important to make sure you have the money to pay back a personal loan, but it’s also important to keep in mind that this needs to be done in a timely manner. If you start to make late payments, late fees can start to pile up and you could also be doing harm to your credit history. This is an important thing to keep in mind, as your credit history can have a significant impact on your ability to borrow money down the line.
So, while it’s normal to be forgetful every now and then, you’ll want to make sure that this habit doesn’t work its way into your loan repayments. If you’re looking for a way to avoid this, some financial institutions will give you the option of setting up automatic payments. By doing this, your bank account will be automatically debited the amount of your loan payment on the day it’s due to be made without you needing to take any additional action.
Am I Allowed to Make a Loan Payment Before the Due Date?
Earlier we mentioned that you may be able to reduce the total amount of interest you end up paying over the term of your loan. On top of that, getting out from under whatever debt you’re carrying as soon as possible can be a great way to cut out some of the stress you might be feeling around your finances. Having said that, there are some important things to consider before you go out and make an early payment.
The biggest thing to keep an eye out for is an early repayment fee. Essentially, there are some lenders that will make you pay an additional fee if you make a payment before your due date. Because of this, you’ll want to make sure you’re very clear on the terms of your loan before you decide to make a payment outside of the designated schedule.
Ultimately, you’ll need to weigh your options and figure out what makes the most sense for you. First, try to determine whether you can even make an early payment in the first place. Then you’ll need to see if there’s a penalty for early repayment, what it is, and whether or not it makes sense to pay off your loan early.
Which Personal Loan Should I Pay Off First?
If you’re in the midst of trying to pay off multiple loans, you might find yourself facing the decision of which account you should focus more of your resources on. The truth is, you should be making every one of your regular payments on all your accounts.
With that in mind, there are a couple of different debt repayment methods that could help to guide your decision-making process. One of these is the avalanche method. Within this framework, you’ll dedicate whatever extra money you have to paying off the debt account of yours with the highest interest rate. The idea is that you’ll be saving money by eliminating the account that’s likely hurting your bank account the most.
The next tactic we wanted to highlight is the snowball repayment method. With this, you’ll start by paying off whatever debt of yours is the smallest and easiest to pay off. Once that’s done, you’ll move on to whatever your next smallest debt account is. The potential benefit of this framework is that by paying off debt after debt in a relatively quick succession (at least, more quickly than if you started with your biggest debts), the quick wins will help to keep you motivated throughout the debt repayment process.
What If I Know That I’m going to make a Late Payment Ahead of Time?
A large portion of the tips we’ve given are centered around situations where you’ll have the money to make your payments on time. And while we’ve already pointed out the importance of making sure you have the means to pay off your loan before you actually apply for it in the first place, we understand that life can sometimes be unpredictable.
If you find yourself in a situation where you’re looking at your payment due date and you know you won’t be able to make it, the first thing you should do is inform your lender. This way, if there’s any opportunity to work some sort of arrangement out with them, you’ll be giving yourself as much time as possible. In the end, there’s no harm in asking the question.
Aside from this, you may want to look into whether there’s a loan repayment assistance program out there that you could utilize, depending on the loan. Spend some time doing research to see what your potential options are.
Improve your Understanding of How to Manage a Personal Loan
It’s not uncommon to find yourself in need of some extra money now and again, and applying for a personal loan can be a way to get what you need. But it’s important to remember how impactful taking on debt can be. Because of this, you should keep responsible personal loan management at the forefront of your thoughts whenever you’re considering taking on debt.