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A personal loan can help you finance home improvements, pay for medical bills, or cover a sudden expense, such as car repairs or a broken furnace. Used wisely, a personal loan may offer financial relief and help you afford expenses you might not be able to cover otherwise. However, a personal loan is a responsibility, and it needs to be managed wisely. These tips for managing loans can help set you up for success.
What Is a Personal Loan?
A personal loan is money you borrow from a lender and repay with interest over time. Banks, credit unions, and online lenders provide personal loans. Once you’re approved, the money is disbursed to you in a lump sum. One of the personal loan benefits is that these loans can be used for a variety of purposes. You can take out a personal loan to cover wedding expenses, consolidate debt, finance a large purchase like a set of furniture, or remodel your kitchen, among other things. There is more than onetype of personal loan. The type that may work best for you generally depends on your specific situation. Some of the different personal loan options you can explore are secured personal loans, unsecured personal loans, debt consolidation loans, vacation loans, wedding loans, and installment loans.
7 Tips for Managing Your Personal Loans
Once you have a personal loan, it’s important to learn how to manage it. Here are personal loan tips that can help you with managing loans.
1. Create a Budget
The first step to manage your loan is to create a budget to help track your spending. Make a list or set up a spreadsheet of all the expenses you have each month. Separate the necessities, such as your rent, utilities, car payment, groceries, and loan payment, from other costs you might incur, like entertainment, dining out, and so on. Make sure you have enough money in your bank account to cover the necessities, including the personal loan payment each month. If you don’t, cut back on the optional items, such as going to the movies or out to dinner. You could even consider taking on a side hustle to earn some extra cash.In general, before you take out a loan, you should have a solid plan in place for making the payments every month.
2. Decide Where To Put The Money
Once you get the loan funds from your lender, you need a safe place to put them. A checking account is usually the easiest option because there aren’t any withdrawal limits like there are on a high-yield savings account. That way you can withdraw the loan proceeds as needed.
3. Consider Paying More Than The Minimum Due
If you can afford to pay more than the minimum amount due on your personal loan each month, you may want to consider doing so. By paying more, you could reduce the length of your repayment plan. This could also reduce the amount of interest you will pay, saving you money overall. However, not all lenders allow you to pay off your loan early. Some may charge fees, called prepayment penalties, which could cancel out the benefits of repaying your loan early. Check your loan contract to see if any penalties or restrictions apply.
4. Automate Your Payments
Signing up for autopay can help you simplify and manage your loan. By using autopay, you can avoid missing a payment. Missed payments may lead to late fees and a negative impact on your credit score. And too many missed payments could even result in a default on a personal loan. Just make sure you have enough cash in your account before the autopay date.Some lenders offer reduced rates to borrowers who set up automatic payments. Though these discounts are small, they can still lower the amount you pay each month.
5. Monitor Your Credit Score
Your credit score is important when you’re applying for a mortgage, an apartment, or a credit card. A high credit score can help boost your approval chances, as well as your likelihood of being approved for lower interest rates. If ever you miss a payment on your personal loan, it may have a negative effect on your credit score. Check you score regularly to make sure it’s in good standing.
6. Keep An Eye Out For Refinancing Opportunities
It can sometimes make sense to refinance a personal loan. For instance, if you can get a lower interest rate with refinancing, especially if your credit score has improved since you first took out the personal loan, you may be able to save money with lower interest payments. If you’re thinking about refinancing, you should compare personal loan offers from multiple lenders to find the best rates and terms.
7. Consider Debt Consolidation
If you have more than one personal loan, you may benefit from debt consolidation to help you manage your loans. Debt consolidation is when you take out a new personal loan and use it to repay all of your other loans. Then you make just one monthly payment on your new loan, instead of multiple payments on multiple loans. You might even be able to get a lower interest rate on the new loan than you had on the previous loans. Explore the options to see what you may qualify for.
Finding the Right Personal Loan Repayment Plan
Personal loan repayment terms can vary, depending on whether the loan is a short-term loan or long-term loan. However, most personal loan repayment terms are two to five years. Generally, the longer the repayment plan, the less your monthly payments will be, but the more you will end up paying in interest over the life of the loan. You should consider the monthly payment amount and the interest rate to find the right loan repayment term you can afford.
Managing Short-Term vs Long-Term Personal Loans
As mentioned, personal loans are available in short-term and long-term options. The term indicates the length of time that you have to repay the loan. Generally, a personal loan under 12 months is considered a short-term personal loan. Short-term loans often have higher interest rates than long-term loans, and the amount you can borrow with a short-term loan is typically lower. A payday loan is one example of a short-term loan. These loans can be more difficult to manage because the time to pay them off is limited, and the amount you have to pay might be high because of interest. Unless you are confident you can repay a short-term loan on time, you may want to think twice before taking one out. Weigh the pros and cons carefully.Many traditional personal loans are long-term loans you repay in regular monthly payments over several years. It’s typically easier to manage long-term loans using all the tips we outlined above, because the interest rates tend to be lower and you have longer to repay them.
Personal Loans With Lantern
Personal loans provide you with funds you can use for almost any purpose. As long as you have a solid plan in place for managing your loans and repaying them on time, a personal loan may be a financing option to consider. If you are looking for a new personal loan or want to consolidate your existing personal loans, Lantern can help. With our online tool, you can get offers from multiple lenders at once, making it quick and convenient to compare rates and terms to find the best loan for you.
Frequently Asked Questions
How do you manage a personal loan?
How do you manage a long-term loan?
What are some tips for organizing your loans?
Photo credit: iStock/pondsaksit
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About the Author
Jason Steele
Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
