When you take out a personal loan, you have to pay the principal, interest, and fees every month. Late payments can lower your credit score and cost you extra fees.
On the other hand, because of the way interest rates work on personal loans, paying off your loan early will save you money. Make a plan for managing your loan so that you can pay off your loan balance sooner.
Be careful when creating your budget
Loan payments mean more monthly expenses. If you need to make room in your budget for a loan payment, consider minimizing unnecessary expenses, such as:
- Eating out.
- Streaming service.
- Gym membership.
- Leisure travel.
- alcohol.
- Monthly subscription service.
Rewrite your budget to include your monthly loan payments, and if your debt-to-income ratio from loans is too high, reconsider taking out a personal loan.
— Howard Dvorkin, CPA and Chairman, Debt.com
Set up automatic payments
When setting up payments on a personal loan, you often have the option to set up autopayments, which means the lender will automatically debit your payment from a designated bank account or credit card at the same time every month.
Setting up autopayments can help you avoid the hassle of forgetting to make a payment each month, and many lenders offer autopayment discounts that can lower your interest rate by 0.25 or 0.50 percent.
Paying an extra amount towards a personal loan can help you pay off your debt faster. Plus, if you pay off your loan early, you won’t pay as much interest and the loan will cost you less, unless there are prepayment fees.
How to pay off a personal loan fast
Find a strategy that fits your budget.
Add money to your monthly payment
Paying a little more each month is a surefire way to reduce your balance faster. It reduces the amount of interest you pay. It doesn’t matter how much of an extra payment you make; even a little extra on your monthly payment can make a big difference.
Pay every two weeks instead of monthly
Some lenders may let you set up biweekly payments instead of one payment per month. Your payment will be split in half and billed every two weeks. It may not seem like a big deal, but by making larger payments each year, you can reduce the amount of total interest you accrue.
One-time payment
A lump sum is a large amount paid at once, usually much more than your regular monthly payments. If you receive a large unexpected amount of money, like a pay raise or a big tax refund, a lump sum can be beneficial both financially and emotionally.
If you pay in full, your monthly payments will stay the same, but you’ll pay less interest over time.
Consider integration
Combining multiple high-interest loans into a single debt consolidation loan, especially one with a lower interest rate, can make your debt more manageable.
Dvorkin recommends consolidating your debt if you have multiple credit card debts and are struggling to pay them off because of high interest rates. But even if you’re able to pay them off, there are benefits to consolidating your debt that are worth considering: It simplifies your payments and may improve your credit score by eliminating revolving debt.
However, if you can’t save money, consolidation may not be the best strategy.
Before you do, calculate what difference consolidation will make to your monthly payments.
When not to consolidate
If the interest rate on a debt consolidation loan is higher than the interest rate on your current accounts, you won’t save any money and it may not be worth consolidating. To ensure you get a competitive interest rate, get pre-qualified for a personal loan from as many lenders as possible.
Origination fees and other charges can reduce the total price of your new loan, so read the fine print carefully before signing any new loan agreement to make sure you don’t incur any hidden fees.
Refinancing
Refinancing a personal loan involves working with a new lender to borrow the remaining loan amount at a lower interest rate or with different payment terms. Refinancing, like loan consolidation, can save you money by reducing the amount of interest you pay over the life of your loan.
However, high fees associated with refinancing can reduce the value of your loan, making refinancing less worthwhile. A longer repayment term could mean you pay more interest over time.
Calculate the remaining payments on your current loan and the new loan to determine if the cost of refinancing is worth it.
Is now a good time to refinance your personal loan?
The Federal Reserve has repeatedly raised interest rates over the past two years in an effort to cool an inflated economy, and even though there will be no rate hikes in 2024, as of September 2024, the current average personal loan interest rate is a record high of 12.35%.
Due to the high interest rate environment, borrowers who were getting good rates on their existing loans are unlikely to be able to find better rates now. However, if your existing loan has a high interest rate and you’ve been pre-approved for a lower rate, it may be worth it.
Another way to save money on a loan
If you don’t meet the requirements of traditional management methods or don’t want to repeat the borrowing procedure, there are other ways to save on the overall cost of a personal loan.
- Talk to your lender. See if you can adjust your terms or lower your interest rate. “On-time payments, good credit history, and other factors like this can help you in this process,” Dvorkin says.
- open Balance Transfer Credit Cards. You can save a significant amount of money if you pay off your balance during a card’s interest-free promotional period. There’s usually a 3 percent fee for each balance transfer, and you’ll be charged credit card interest if you still have a payment outstanding at the end of the promotional period.
How to Manage Your Loan: Key Points
There are multiple ways to manage your personal loan and save money in the process. Remember, every little bit counts. Every extra dollar you can put towards your monthly payment is beneficial. Make sure you consider all your options over the life of your loan.
You may not be able to consolidate or refinance to get a lower interest rate right now, but that doesn’t mean it won’t make sense in the future. As your financial and credit situation changes, so will your repayment options. Keep your options in mind until the day you pay off your balance in full.
