5 ways to avoid falling behind on your personal loan repayments
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When you take out a personal loan, you are committing. You agree to make a payment each month until you have repaid the loan, plus interest. Failure to do so can have serious consequences.
Falling behind on your personal loan repayments can seriously hurt your credit score, making it harder to borrow money in the future. Your debt could also be sent to collections, or you could face legal action to recover the money. Here are five strategies you can use to avoid these situations.
If you are considering a personal loan, Credible allows you to see your prequalified rates from various lenders, all in one place.
1. Borrow only what you need
When you take out a personal loan, you can choose how much to borrow. Some personal loan companies offer loans of up to $100,000.
But think carefully about what you need the money for before committing to a loan. Borrow only what you need, because the more you borrow, the more you have to pay back. Larger loans require larger monthly payments, which can become difficult to manage.
2. Create a budget
A budget is a plan that brings together all the ways your money comes in and where it goes out. It will show you how much you spend each month, how much you earn and how much you save. It can also show you how much leeway you have to add another debt payment – your potential future personal loan.
Start by gathering all your bills, payslips and bank statements. Write down how much you earn each month, as well as your fixed expenses (like rent or mortgage payments), loan payments, and utilities. Divide other expenses into categories, such as groceries or entertainment. Look at where you’ve spent money in the past and assess if there are areas where you could spend less. You can set a goal for each type of expense for your budget in the future.
When working on your budget, be sure to include a savings category. If you are able to build up your savings, you may not need to take out a loan to cover a later expense.
With this budget in hand, you can more easily see how a potential personal loan repayment would fit in with your other monthly expenses and whether you have enough income to cover it. This can help you avoid any problems with late repayment of a loan before it even begins.
A personal loan can be a great way to consolidate high-interest debt and keep your budget on track. Visit Credible for compare personal loan rates from various lenders, without affecting your credit score.
3. Pay more than the minimum
After getting a personal loan, you will have a required monthly payment, but you can also choose to pay more than this amount if you have extra cash in your budget. This can help you pay off your loan early, reducing your total interest costs.
But make sure your personal loan has no prepayment penalty. Some lenders charge a fee if you repay your loan early. The best personal loans do not have prepayment penalties.
4. Sign up for automatic payment
Autopay is a service offered by many lenders that will automatically withdraw your loan payment from your bank account on the due date. This will help you avoid missing loan payments. In many cases, you can get a discount on your interest rate by signing up for automatic payments.
With automatic payment, you have to be more attentive to your bank account balance. The lender will likely charge you an insufficient funds fee if you don’t have enough in your account to cover the payment by the due date.
5. Consolidate all your debts
If you have a number of different debt payments due each month, it’s easy for just one to slip through the cracks. You can consider consolidating your debts — such as credit cards, medical bills, and personal loans — to help you better manage all of your obligations. You might even be able to reduce the total amount you pay if you can get a lower interest rate on a consolidation loan than you pay on average with your checking accounts.
A personal loan is a good way to consolidate your debts, especially credit card balances. Personal loans typically have lower interest rates than credit cards, and they can give you a specific end date for when you’ll finally get out of debt.
If you choose to consolidate your debt, follow these steps:
- Take stock of your debt. Collect all your bills and account information. Write down your monthly payments, the interest rate on your loans, and the due date of your payments. Add the outstanding balances. This will tell you how much you will need to borrow to consolidate your debt.
- Check your credit score. Your credit score is an important factor in the interest rate you will receive on a personal loan to consolidate your debt. The better your score, the more lower your interest rate will be. With bad credit, you may have fewer loan options. Request your credit reports from the three major credit bureaus, which you can do for free using a site like AnnualCreditReport.com. Review the reports and make sure there is no incorrect information, such as accounts listed as overdue that are in fact current.
- Shop around for a loan. Request quotes from several different lenders. In many cases, you can get a personal loan offer without negatively affecting your credit score. When you get quotes, make sure they offer enough to consolidate all your debts. Find a lender who offers you a low interest rate and a loan term long enough to keep your monthly payment manageable.
- Apply for a loan. When you have found the best lender for your situation, they will give you instructions on how to proceed with a complete loan application. You may need to provide documents proving your income and assets, such as bank statements and payslips.
- Use the loan to pay off your debts. Once your application is approved, the lender will disburse your loan funds, usually by direct deposit to your bank account. You can use this money to pay off all your current debts. In some cases, your personal loan company will pay them back for you, so ask if your lender offers this option.
- Keep paying your debts until you know they’ve been paid. It’s important not to miss a payment because you thought the debt was paid off. Get confirmation that your debt is satisfied before you stop paying those bills.
If you’re ready to apply for a personal loan to consolidate your debt or cover another expense, Credible lets you compare personal loan rates so you can find the one that best suits your needs.