There are times in your life when, depending on the circumstances, it might seem like a good idea to apply for a personal loan. Whether you need a mortgage to help you buy your first house, a student loan to help you pay for your education, or you simply need a line of credit to help you with an emergency expense, borrowing money can sometimes be just what you need to help you get over whatever financial hump you’re facing.
Whatever your needs are and whatever type of loan you end up applying for, it’s incredibly important that you have a good understanding of how to manage a personal loan. If you get in over your head, you can risk finding yourself in an unending cycle of debt, destroying your credit score, and generally doing serious harm to your financial standing.
Having said that, if you go about things the right way, you may be able to put yourself in a good position to make sure you can afford your loan, pay it off in a timely manner, and mange it in a healthy way.
What is a Personal Loan?
A personal loan is simply money that you borrow from a financial institution. Unlike a business loan, it’s intended for personal use. You can apply for a personal loan from a bank, credit union, storefront lender, or online lender.
With some types of personal loans, interest on what you’ve borrowed is going to build during the lifecycle of your loan. What this means is that if you can find a way to pay off what you owe before the due date that was set out in your loan agreement, you could ultimately save money on the total interest you’ll need to pay. But more on early loan repayment later.
On top of interest payments, certain personal loans will also come with other charges, like origination fees or other types of fees. The amount that a loan will cost you over the course of a year is called the annual percentage rate (APR).
How Should I Incorporate Loan Payments Into my Budget?
While in many cases, the cost of a loan is going to be expressed to you on a yearly basis (through the APR), this doesn’t mean that you’re only going to need to make one payment a year. Depending on the type of loan, you’ll make regular loan payments on a scheduled basis, like with an installment loan. In the case of a personal line of credit, you’ll have specific due dates by which you’ll need to pay back what you’ve borrowed instead of having to make your payments on a specific date.
In either case, if you need to make personal loan payments, you’re going to want to incorporate these payments into your budget. Don’t have a budget? Well, it’s never too late to start using one! There are plenty of budgeting methods out there, so you’ll need to do a bit of research to figure out which one works best for you. To help give you some idea of what’s out there, check out these budgeting guides on:
Using a budget, you can determine whether or not your expenses exceed your income. If they do, you’ll need to find ways to cut back to make room for essential things, like your loan payments. In fact, you should use a loan calculator before you agree to take on debt to get an idea of how much a loan is going to cost you and if you can fit those payments into your budget in the first place.
What If I Don’t Have Room in my Budget for Loan Payments?
Before you even think about starting a loan application, you’ll need to spend some time researching your potential options to find what might work for your situation. If you find that the cost of a loan is going to be too much for your finances to handle, you shouldn’t apply for a personal loan.
If you’re facing an emergency expense and have no other means to pay for it, you may want to look into what potential emergency loans are out there, and if any of them are suited to you. Just make sure to have a strong handle on your budget so you have a good idea of where your finances currently stand.
Should I Automate my Loan Payments?
One of the most important aspects of personal loan management is to make sure you’re always making your loan payments in a timely manner. Making late payments can do serious damage to your credit history over time and can force you to pay more money than you had initially planned. Damaging your credit score can hinder your ability to borrow money moving forward, particularly at rates that suit your financial situation.
While everyone has moments of forgetfulness, it’s essential that these moments don’t extend to your loan repayments. To help avoid running into this problem, a lot of financial institutions will let you set up automatic loan payments. This means that on the day you’re scheduled to make a loan payment, your bank account will be automatically debited the necessary amount without you having to take any action.
Should I Pay Off my Personal Loan Early?
Like we mentioned, there may be some benefits to paying off your loan early. For starters, it can reduce the total amount of interest you’ll end up paying over the course of your loan. It can also be a good idea to get the weight of carrying debt off of your mind as soon as you can!
Having said that, one thing you’re going to want to look out for before you try to pay your loan off early is an early repayment fee. Some financial institutions may charge you fees for making any early payments. So, it’s important for you to make sure that you’re aware of any prepayment penalties you might face before making your payment.
In the end, whether or not you decide to repay your loan early is up to you. You’ll need to figure out if you can afford it, if there are any early repayment fees that you need to consider, and whether or not early repayment makes sense for your personal situation.
If I Have More Than One Personal Loan to Pay Off, which do I Start With?
If you’ve got multiple debt accounts on the go, you may end up in a situation where you’ve got to decide which ones you’re going to pay off first if you’re trying to pay them off early (keeping in mind that you should still make all of your regular payments on all your accounts). There isn’t a best answer to this question, and ultimately, you’ll have to decide what to prioritize. Having said that, there are a couple of common debt repayment methods that can give you an effective structure to follow.
The first one is the avalanche method which dictates that you put any extra money you can spare towards paying off your debt account with the highest interest rate. This can help you save money in the long run by eliminating your high interest accounts first.
The second method is the snowball method. This technique dictates that, instead of funneling your extra money to high interest debt, you put it towards your smallest debt first. Once the smallest account has been paid off, you would then shift to paying off the next smallest. The idea here is that by paying off your smaller debt accounts relatively quickly, you’ll gain some extra motivation that’ll keep you going as you look to pay off all your debt.
What If I’m Not Able to Make my Payment on Time?
A lot of what we’ve talked about here only applies to people who have the money and ability to make their payments in the first place. While you should always make sure you’ll be able to pay off what you’re planning on borrowing before you apply for a loan, it’s possible that you may have some struggles keeping up with your payments along the way. If you find yourself in this situation, you may need to choose between some options.
If you know you’re going to miss a loan payment, you should let your lender know as soon as possible. There’s a chance that they may be able to work with you on some kind of arrangement. There’s no harm in asking at the very least!
There could also be some kind of loan repayment assistance program out there. However, make sure to do thorough research and choose the option that’s right for you.
Learn More About How to Manage a Personal Loan
Loans are an important part of life, and there’s a good chance that at some point, you’ll need to apply for one. Having said that, they can have a big impact on your short- and long-term financial outlook, so it’s important that you understand how they work and how to manage your payments. Make sure to never apply for a loan that you can’t afford and always have a plan in place to pay it off!
Posted in: Personal Loans