While it may not always be your first choice, applying for a personal loan might seem necessary from time to time. Maybe you’ve relied on a personal line of credit to help you with an emergency expense, or maybe you’ve applied for a bigger loan, like a mortgage or auto loan, to help facilitate a big purchase. Either way, a personal loan might be a completely viable option in certain circumstances.
Having said that, while it may seem necessary at times, applying for a loan should not be a decision that’s made lightly. If you take out a loan you can’t afford, don’t pay close attention to the terms and conditions of the loan, or generally mismanage the process, you could find yourself in a cycle of debt that can be hard to break. That’s why it’s so important to understand how to pay off a loan.
Today, we’re going to go over some of the most important things to remember when you’re paying off your personal loan to make sure you’re well-informed going into the process.
Build a Financial Safety Net
Before we dive into the specifics of how to pay off a loan, we should touch on how you might be able to avoid taking out a personal loan in the future.
Like we’ve mentioned, there are times when applying for a loan may be your best option. But once this loan is paid off, it might be a good idea to put the money you’ve been using to pay off your loan to good use. You can start to let this money trickle back into other areas of your budget, but instead, it might be a good idea to start building a financial safety net to give you some peace of mind moving forward.
In this case, we’re specifically referring to building an emergency fund. This is a designated fund that’s only meant to be used in case of emergency. So, if you run into a scenario where you unexpectedly need money right away, you can tap into this fund to help you handle your emergency. Depending on the size of your fund and the cost of your expense, this money may help you avoid having to apply for a personal loan altogether.
Tips to Pay Off Your Loan
If you don’t have an emergency fund to help you out in a financial emergency, then you may be considering applying for a personal loan. If you do, here are some things that may help you during the repayment process.
1. Incorporate Loan Payments into Your Budget
Before you apply for a loan, or at least before you accept a loan offer, you should always make sure that you can afford the loan in the first place. This means that you’ll need to be able to comfortably fit your loan payments into your budget. This can sometimes be easier said than done.
Having to balance your loan payments with all of your regular expenses and bills can be tricky, even if you manage to find a personal loan with affordable rates and terms. If you’re having a hard time seeing how to pay off this loan while still being able to keep up with your other expenses, take a look at your budget and see if there are any areas you can trim down. If you haven’t done a thorough audit of your spending in a while, you might find that there’s a whole host of non-essential things that you’ve been spending money on. These are a good area to start when you’re looking to cut back and save money.
But how do you identify things to cut out of your budget, or at least reduce? Like we said, start with things that aren’t essential to your life. Not everyone is going to have the exact same budget, but these non-essential items could include things like:
- Movie tickets
- Extra streaming subscriptions. If you find you’re mostly using one movie/tv streaming service over the others, you might want to cut out the ones you barely use
- Non-essential shopping sprees
Depending on your situation, you might be able to make enough room in your budget by only cutting out one or two unnecessary expenses. Or maybe one or two won’t be enough and you’ll need to make some more extensive changes to your spending habits. Either way, do what you need to do in order to make the necessary room to pay off your loan.
2. Make Additional Payments if There’s No Penalty
If you’ve taken a look at your budget and found some areas where you can cut back, you might find that you’ve been able to make even more room than you need! If you have a little extra room in your budget, put this extra money to good use. How? By making extra payments on your personal loan in between your scheduled payments.
If you’re able to make additional payments, this could lower the amount you’ll end up paying in interest over the course of the loan. But before you look into how to pay off a loan early, start by making sure that you won’t be penalized for it.
With some financial institutions, you might find that you’ll face a penalty for paying off a loan early. This is likely because they want to make sure they maximize the amount of interest they receive off of the personal loan you’ve taken out. While making early payments may help to reduce the overall interest you pay, it might not be worth it if you’re going to get dinged with a hefty penalty. So, make sure you carefully read the terms and conditions of your loan before you sign your agreement.
3. Make More Than the Minimum Payment
A minimum payment is the lowest amount of money you can pay in order to keep your account in good standing. It can be usually associated with revolving credit accounts like lines of credit and credit cards.
This can be a useful feature when money is tight and you need a way to put off making your full payment. For example, let’s say you’ve worked your loan payments into your budget like we suggested earlier, and you’ll have just enough money to pay for it along with all of your other regular expenses. Then, three days before you’re due to make your loan payment, you’re driving along when you suddenly get a flat tire. You need to get it fixed so you don’t miss any shifts at work, so instead of making the full payment on your loan, you make the minimum payment on your line of credit and use that money to get your tire fixed instead.
In this instance, only making your minimum payment may actually be your preferable option. While this might be a useful option in specific circumstances, don’t use it as an excuse to put off making your full loan payments just because you’d rather spend that money on an expensive meal or a new TV. By opting to only meet your minimum payment, you’ll also carry over this balance to your next payment, and you’ll extend the amount of interest you’ll end up paying on this personal loan overall.
You also won’t be making as big of a dent into your debt as you would otherwise. So, while occasionally using this feature when you’re in a tight spot can be useful, don’t make a habit of it if it can be avoided. Always do your best to make your payments in full, and if you can’t, pay as much as you’re able to in addition to the minimum.
4. Don’t Focus on Paying One Personal Loan Off with Another
If your next loan payment is creeping up on your calendar and you don’t have the funds to make it, you might be tempted to apply for another loan to pay off debt.
If you’ve ever heard of someone doing this before, they’ve probably applied for a debt consolidation loan. These are loans that people use to refinance their debt. Basically, the idea is to bundle several different high-interest debts that you have and then pay those off with an additional, lower-interest loan. This brings all of your debts under one bill which you can focus on paying off.
While this might be a useful technique in certain situations, whether you’re applying for a debt consolidation loan or another type of personal loan, using any type of loan to pay off another debt doesn’t address the root of the problem. It simply moves money from one place to another. All you’ll be doing is moving the debt you have with one financial institution to a different one, and doing this places this debt under a new set of terms and conditions.
What you should really be focused on is implementing healthy spending and saving habits into your life to avoid taking on extra debt. And if you do find yourself in debt and need a few useful tips to help pay it off, take a look at this article.
Be Diligent in the Borrowing Process
No matter how things shake out, your borrowing experience is going to be personal. The terms and conditions may be specific to you, and you’ll need to find your own balance throughout the process.
The personal nature of this process is going to extend to your repayment experience too. You’ll need to keep this in mind any time you apply for a loan. While the tips we’ve listed today may provide you with some general guidance, you’ll need to apply them to your own specific financial situation, which is going to be different for everyone. Just do your best to be careful, do your research, and stay diligent throughout the process!
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