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How to Manage Your Personal Loan

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From pre-qualifying to getting funded, taking out a personal loan can be pretty painless, with many lenders offering smooth online applications and same-day funding.

Managing a personal loan successfully, however, requires understanding how the payments change your monthly budget and creating a clear plan to pay off the loan.

Here are five things you can do to make your loan easier to manage.

1. Build your budget

The first step to mindful loan repayments is knowing what you’ll have left after each monthly payment. Ideally, you would calculate this before applying for a loan, says Rhode Island-based financial planner Greg Young with Ahead Full Wealth Management.

The worst-case scenario is that you get a loan without a clear picture of its impact on your monthly cash flow, leading you to take on more debt to make up for it.

“Even if you’re doing a credit card consolidation loan [and] the only reason you got a consolidation loan is to have one payment, it still makes sense to gauge the impact on your budget,” Young says.

Some people maintain a spreadsheet or other system to track their spending, while others prefer a budgeting app or savings tool.

NerdWallet recommends the simple 50/30/20 budgeting plan, in which you spend 50% of your earnings on necessities, no more than 30% on things you want and 20% on debt repayment and savings.

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Know where every dollar goes

Find ways to spend more on the things you love, and less on the things you don’t.

2. Decide where to put the money

Unless you’re consolidating debt and sending the money directly to your credit card issuers, keeping the loan money in a checking account is best if you want easy access to it.

Withdrawing from a checking account is most straightforward because there are no tax implications, as there may be with a brokerage account or withdrawal limits that a high-yield savings account would have.

Whether you should have the money in a separate checking account depends on when you plan to spend it and how easily you can mentally divvy up the balance between what you can and can’t spend.

It can be psychological, says Tess Downing, a San Antonio-based financial planner. For some people, it’s just easier to see large payments come out of an account they don’t also use to buy groceries.

When Downing took a home equity loan to build a pool at her home, she says she kept the loan money in a separate bank account so when the first payment came due — 25% of the project’s cost, Downing says — her everyday checking account didn’t take the hit.

It comes down to your preference, she says, “and maybe just your discipline.”

3. Simplify your payments

Many lenders offer rate discounts between 0.25 and 0.5 percentage points to borrowers who set up automatic payments, which can drop payments by a few dollars each month.

Perhaps more importantly, automatic payments help you avoid missed payments — which often result in late fees — and make the payment an effortless part of paying your monthly bills.

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Another way to simplify your repayment plan after several months with your current loan is to roll multiple sources of debt together with a balance-transfer credit card or debt consolidation loan. Consolidation puts all of your debts together under one monthly payment at one interest rate.

Consolidating only makes sense if you can get an interest rate that’s lower than the combined rates on your existing debts.

4. Watch for refinancing opportunities

If you’ve set up automatic payments and are sure you’ve gotten the lowest rate on a personal loan, you may still find a diamond-in-the-rough refinance opportunity.

Because of the short terms on unsecured loans, Downing says she doesn’t get a lot of inquiries about refinancing them, but there are times when it’s beneficial.

For example, if you’ve been making on-time payments toward a loan for a while and your credit score has improved, you might qualify for a lower rate.

“It doesn’t hurt to be prudent,” Young says. “If you can lower your payment or your interest rate, that makes sense.”

5. Read the fine print before paying it off early

When you near your final payments, it can be tempting to pay the loan off quickly, but Young recommends weighing the amount you’ll save with early repayment against the potential good it could do elsewhere.

“If you have the cash and the capacity to pay off your loan early,” Young suggests asking yourself, “can I leverage those dollars to increase the quality of life or my revenue somewhere else instead of this loan?”

Prepayment fees are rare in personal loans, but it’s a good idea to review your loan contract before you pay it off to avoid a surprise. If your loan comes with this fee, consider whether the amount of interest you would accrue by waiting for the end of the loan’s term is higher than the amount the prepayment fee would cost.

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