When managed responsibly, a personal loan can be one of the best ways to relieve financial burdens and set yourself up for success. It’s an easy way to cover a down payment, handle an emergency, or take your family on a vacation. A personal loan, however, can also be challenging to manage—especially if you’re new to loans and budgeting in general— and the last thing you want is to wreck your credit score or miss a payment.
If you’re having a difficult time managing your personal loan, these tips will help you regain control and relieve any financial stress you may be experiencing.
- Create A Budget
Creating a budget is one of the best things you can do for your financial situation, regardless of your income or debt. Trying to manage your personal loan without a budget puts you in a position of vulnerability and confusion—you don’t always know where your money is going or how much of it is going there. If you find yourself afraid to check your bank account, having less money than you know you should, or are unsure of areas where you’re overspending, then creating a budget might be the answer.
The first step in budgeting is to divide your expenses into categories. It’s better to start off with broad categories, like “Food”, rather than categories like “Coffee”, “Fast Food”, “Groceries”, and “Dining Out”. Simple categories are easier to calculate and keep track of. If you have no idea how to go about making a budget, there are plenty of free resources online to help walk you through the process. There is also an abundance of apps that make keeping up with your budget simple and easy.
- Pay on Time
Making your monthly payments on time every month is the best way to avoid late fees and penalties as well as hits to your credit score. These are unnecessary and all-too-common consequences that will work against your financial situation, so be mindful of them and do your best to stay on top of payments.
Once you create a budget, you’ll realize it’s much easier to make payments on time. Having a financial plan and a portion of money set aside each month will prevent you from being unable to make a monthly payment on your loan. If you find yourself forgetting to make your monthly payments, see if your provider offers an automated payment system.
If you’ve just taken out a personal loan, or are about to, a great way to give yourself a cushion is to make an early monthly payment as soon as you receive the loan. By being a payment ahead of your installment plan you’ll have a buffer against a missed payment.
- Pay More than Your Minimum
Following the same strategy of making an early initial payment, it helps to pay more than your monthly minimum when you can. Paying a little extra each month keeps you ahead of your loan term as well as provide you with some other financial perks.
For one thing, making extra payments on your loan will reduce the overall length of your repayment plan. This will help clear you of debt and enable you to regain your financial independence even sooner, and by paying off your loan ahead of time, you’ll reduce the amount of interest you owe, saving you money in the long run.
Not only that, but your credit score will also improve when you pay off your debts faster than expected. A lower credit score will benefit you in a variety of ways, like lowering down payments and interest rates for a long time to come.
If you’re considering paying more than the minimum on your monthly loan installments, be sure to read up on your provider’s policy regarding this. While some will allow you to pay your loan off faster, others may charge fees for doing so, negating the benefits of early repayments.
- Consolidate Your Loans
For borrowers managing multiple personal loans, consolidation could be a great way to simplify your debt repayment. Debt consolidation is when you take out a single, large loan that can be used to repay all of your other loans and debt. Then, instead of making payments to multiple lenders each month with different interest rates and requirements, you will be making a single payment to one provider.
Debt consolidation is especially helpful if you’re able to secure an interest rate on your new loan that is lower than the average interest rate of your previous loans.
The only downside to consolidating your debt is that you will likely end up having to repay your debt faster than before. Before consolidating your debt, be sure that you can make the payments on your new loan. It might also help you to repay large portions of your loans on credit rather than with a single loan, consolidating it in more manageable pieces.
- Keep an Eye On Your Credit Score
Lastly, keep a close watch on your credit score while repaying a personal loan. Your credit score plays a big role in your finances and has an important relationship with the loans you take out—your credit score will affect and be affected by your personal loans.
The way you manage your personal loans will be reflected in your credit score. Sticking to your monthly installment plan or even getting ahead of it will improve your credit score. Falling behind on your payments, on the other hand, will lower your credit score.
Having a higher credit score is important for a variety of reasons. Your credit score is how prospective lenders determine your reliability. The more reliable you seem, the lower your interest rates and down payments will be. High credit scores can also help when making a big purchase, like a home or car, and give you access to premium credit cards with great benefits.
The key point:
Managing a personal loan can be a straightforward and stress-free process once you’ve worked out the kinks involved. Being disciplined with your finances, setting a well-thought-out budget, and getting ahead on your loan whenever you can will place you ahead of the curve and make managing your personal loan as easy as 1-2-3.