Taking out a personal loan is a step that can help you deal with what’s going on in your life — whether you want to make improvements to your home or need funds to handle an emergency.
Whatever the reason for getting a loan, you need to make sure you manage it responsibly because the last thing you want is to end up in a worse financial position than where you started.
Continue reading to learn tips on how to manage a personal loan responsibly so you don’t end up wrecking your credit and ruining future financial opportunities.
Strategies for Responsible Loan Management
Just like any other financial decision you make, you want to handle your personal loan responsibly. The following are some ways to do it.
Start budgeting your payments right away
Before applying for a personal loan, have a clear picture of how you’re going to make monthly payments so you don’t end up scrambling to find the money to pay your monthly bill.
Figure out how much you’ll have left over after making your loan payment every month and determine how that will impact the rest of your household expenses.
Divide your budget into broad categories like loan repayment, housing, food, car expenses, and utilities, and think about how much you can realistically spend for each category after making your loan payment.
Are there areas you can reduce your spending? Also, consider your cash flow and ways you may be able to increase the money coming in.
Make sure you know your payment due date
Your due date needs to be top of mind so you can ensure that you never forget to make a loan payment. Whether you put a reminder on your calendar or schedule payments ahead of time, you need always to know when your payments are due so you don’t incur late fees.
Set up automatic payments
Setting up automatic payments not only helps you keep your account up to date, but it may also save you money. In fact, some lenders will lower the percentage of your interest rate by 0.25% to 0.50% as a reward for setting up automatic payments.
This can lead to significant savings — in some cases, hundreds of dollars a month — but, in order to take advantage of this benefit, you have to make sure the due date comes during a time of the month you’re easily able to pay.
Luckily, your lender can work with you if you need to change the date around when you expect to have money coming in.
Contact the company and explain your situation so the date can be adjusted to the time of the month that works best for you.
Check your credit report after making a few months of loan payments
After you’ve been making your loan payments on time for a few months, check your credit report to ensure that the lender is accurately updating your information and that your credit report reflects that you’re in good standing.
Sometimes lenders may not be up-to-date in their reporting, or worse, make a mistake that can negatively impact your credit score.
A missed loan payment can stay on your credit report for up to seven years, so you want to make sure the bank hasn’t accidentally reported any late payments.
Request a free credit report from each of the three credit reporting agencies — TransUnion, Equifax, and Experian — to ensure your information is up-to-date and accurate.
Look for ways to pay the loan off early
Of course, you want to pay off your loan as soon as possible, but you may be causing more harm than good if you do.
In some cases, lenders may actually charge a prepayment penalty, so find out if there’s a charge when you pay your loan off early.
If there is a prepayment fee, weigh that amount against what you would pay in interest on your balance if you decide to wait. If the fee is more than your interest, it’s best to continue paying as usual for the duration of the loan.
If there is no fee, or the interest is more than the fee, it’s a good idea to look at your budget and find ways to spend less on monthly bills and a little bit more on your loan to pay it off faster. This will save you money, and give you peace of mind.
If you end up having trouble paying, call the lender immediately to work out a plan
Life happens, and things come up that may derail your plans — and that includes your ability to make the monthly payments on your personal loan.
Although it’s a difficult situation to face, you should tackle the problem head-on. Be sure to immediately contact your lender as soon as you discover that you’re running into financial trouble, because if you don’t, you may eventually end up in default — which will negatively impact your credit for a long time.
Before making the call, examine your finances so you know exactly where you are.
Your lender will work with you to find solutions, which may include a deferment for a certain amount of time or a repayment plan.
You may need to work with a financial wellness company to help you get back on track, or if the loan is already delinquent, a credit counselor may be needed.
If you have a high interest rate on your current loan, look for refinancing opportunities to get a lower rate and save money
When you make payments on your loan for a while, it goes a long way toward improving your credit score — which means you’re in a position to possibly find refinancing options that can save you money.
Personal loan interest rates can go as low as 3.49%, so if you’re paying more, it’s worth your time to shop around after you’ve raised your credit score.
Find out what kind of refinancing you can qualify for, crunch the numbers of the different offers you get, and choose an option that will save you the most money.
Dos and Don’ts of Personal Loan Management
When you borrow money, no matter the amount, there are specific things you should do to ensure you get the best terms and rates with your loan and pay it off successfully.
There are also some actions that can derail your efforts to be a successful borrower. Learn these personal loan dos and don’ts below.
Compare personal loans and find one to match your needs and goals.
Frequently Asked Questions
Taking out a personal loan should not be taken lightly.
You may have many questions about the ins and outs of getting a personal loan, and the following are answers to some common questions that may come up as you do your research.
What will qualify me for a personal loan?
All lenders have their own criteria for approving you for a personal loan; however, there are some things that banks will generally look for.
When applying for a loan, you will be scrutinized on their credit score, payment histories on other debts, income, and the collateral they can pledge in case they default on the loan.
In addition, banks will look at your debt-to-income ratio, which will let you know if your other financial obligations will make it difficult to pay the money back.
What is the minimum salary to get a personal loan?
The minimum salary to get a personal loan depends on the specific bank and how much you want to borrow, and it can range between $15,000 and $45,000 a year for a smaller loan, while larger loans will require a higher minimum income cutoff.
In order to get an idea of what you may need to earn to be approved for a loan, use an online personal loan eligibility calculator.
What credit score do I need to get a personal loan?
Although you don’t need to have a perfect 850 credit score to get a personal loan, banks still expect a score that indicates you’re a good credit risk.
While each bank has different minimum credit scores they will consider, usually a 610 to 640 minimum is expected.
However, there are some lenders who will issue loans to those who have lower credit scores, but these consumers can expect to have higher interest rates and less favorable terms.
How do I get preapproved for a personal loan?
Getting preapproved for a loan means a bank will let you know the likelihood of you receiving a loan before you complete the application process.
In order to be preapproved for a loan, you need to provide information about how much you want to borrow, how much you earn, and what other debts you are carrying.
What type of personal loan is without collateral?
A personal loan that does not require collateral is known as an unsecured loan. Instead of using assets to back this type of loan, banks approve them based on people’s creditworthiness.
