How to manage your personal loan and save money

Taking out a personal loan can be a useful way to consolidate debts or pay for additional expenses. People often use personal loans to pay for weddings or vacations, finance home renovations, or finance major purchases such as a new vehicle.

Once you take out a personal loan, you will be required to make monthly payments, including the amount borrowed, the interest charged by the lender, and applicable fees. Creating a plan to manage your loan can help you pay off your balance faster, saving you money in the long run.

Be careful when budgeting

Taking on a loan payment means increasing your monthly expenses. If you need to make room for the loan payment in your budget, consider minimizing spending on additional expenses, such as:

• Dining out.
• Streaming services.
• Gym memberships.
• Additional trips.
• Alcohol.
• Monthly subscription services.

Your debt-to-income ratio (DTI) calculates the amount of debt you have versus how much money you make. It is generally considered good practice to have a DTI of 36 percent or less to increase your chances of approval.

Set up automatic payment

When setting up payments for your personal loan, you often have the option to set up automatic payments. This means that payments are automatically debited from a specified bank account or credit card at the same time each month.

It can be helpful to set up autopay because it reduces the effort you have to make monthly payments. Lenders may also offer an autopay discount upon enrollment, which can save you money on interest over the life of the loan.

Pay extra when you can

Paying extra money for your personal loan can help you pay off your debts faster. Additionally, paying off the loan early means you won’t pay as much interest and the loan will cost you less, as long as there are no prepayment fees.

Add money to your monthly payment

Making slightly higher monthly payments is a surefire way to see your balance drop faster. This reduces the amount of interest you pay. It doesn’t matter how big or small your extra payment is. Even adding a small amount to your monthly payments can make a significant difference.

Make biweekly payments instead of monthly

Some lenders let you set up biweekly payments instead of one monthly payment. Your monthly payment amount will be halved and charged every two weeks. While it may not seem like you’re doing much, adding an extra payment each year can help you reduce your overall interest accrual.

Pay a lump sum

A lump sum is a one-time larger payment and is usually much larger than your normal monthly payment. If you receive an unexpected change, such as a pay increase or a large tax bill, making a lump sum payment can be financially and psychologically beneficial.

When you pay a lump sum, your monthly payment amount remains the same, but the interest you pay over time decreases.

Consider consolidating

By consolidating multiple high-interest loans into one lower-interest loan, you can pay off your debts in a shorter time. “It’s a good idea to consolidate personal debt, such as credit card debt, if you have multiple credit card debts over $10,000 and you’re having trouble paying the principal due to high interest rates,” says Dvorkin.

While consolidation is a great tool for some, it is not a one-size-fits-all solution. There are times when consolidation is an ideal loan management tool, such as if you just want to simplify your monthly payments. There are also scenarios where refinancing may not be the best idea. To limit potential risks, calculate the difference consolidation can make to your monthly payments and whether you’ll pay less overall.

When not to consolidate?

If the debt consolidation loan has a higher interest rate than your checking accounts, you won’t save any money and it probably doesn’t make sense to consolidate. To ensure you get a competitive rate, pre-qualify with as many lenders as possible.

Additionally, if the new loan comes with fees (including origination fees and prepayments), these can add up quickly and detract from the overall value of your loan. Read the fine print before signing a new loan agreement to ensure you don’t incur any hidden fees.

Refinance

Refinancing a personal loan requires you to work with a new lender to get a loan against your remaining loan amount with lower rates or different payment terms. Similar to consolidating, refinancing can save you money by lowering the amount you pay in interest over the life of the loan.

However, if the costs associated with refinancing are high, they will erode the value of your loan and it may not be worth it. Additionally, if the repayment term on the new loan is longer, you may end up paying more interest over time.

Calculate the amount you’ll spend on the remaining payments with your current loan versus the new loan to determine if the refinancing costs are worth it to you.

Is Now a Good Time to Refinance a Personal Loan?

The Federal Reserve has raised interest rates several times over the past two years with the aim of cooling the bloated economy. As of April 2024, the current average interest rate on personal loans is at a record high of 12.21 percent.

Due to the high interest rate environment, now is probably not the best time to refinance for most borrowers. However, if the interest rates on your existing loans are high and you qualify for a lower rate upfront, it may be worth it.

Alternative ways to save money on your loan

If you don’t qualify for the traditional loan management methods or don’t want to go through the loan process again, there are other ways to save money on your personal loan.

• Talk to your lender. See if you can adjust your conditions or get a lower interest rate. “On-time payments, a good credit history and other similar factors can help in this process,” says Dvorkin.
• Open a balance transfer credit card. These cards allow you to transfer debts at minimal cost. Additionally, it is common for issuers to offer an interest-free promotional period.

it comes down to

There are multiple ways to properly manage a personal loan and save money along the way. Keep in mind that no amount is too small: any extra amount you can put toward your monthly payments will be beneficial. Consider all your options throughout the life of your loan.

You may not be able to consolidate or refinance and get a lower rate right now, but that doesn’t mean the method won’t make sense in the future. As your financial and credit health evolves, so do your repayment methods. However, to maximize your money-saving potential, keep all your options in mind until the day you pay off the balance.