When you take out a personal loan, you’re making a commitment. You promise to make a payment every month until you’ve repaid the loan, plus interest. Failing to do so can have serious consequences.
Falling behind on your personal loan payments can lead to a serious hit to 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 those situations.
If you’re considering a personal loan, Credible makes it easy to see your prequalified rates from various lenders, all in one place.
- Only borrow what you need
- Create a budget
- Pay more than the minimum
- Enroll in autopay
- Consolidate all your debts
When you take out a personal loan, you can choose how much to borrow. Some personal loan companies offer loans for as much as $100,000.
But think carefully about what you need the money for before committing to a loan. Only borrow 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.
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’re spending each month, how much you earn, and how much you’re saving. It can also show you how much wiggle room you have to add another debt payment — your potential future personal loan.
Start by gathering together all your bills, pay stubs, and bank statements. Write down how much you earn each month, as well as your fixed expenses (like rent or mortgage payments), any loan payments, and utilities. Divide other spending into categories, like groceries or entertainment. Look at where you’ve spent money in the past, and evaluate if there are any areas where you could spend less. You can set a target for each type of spending for your budget moving forward.
As you’re working on your budget, make sure you’re including a category for saving. If you’re able to build your savings, you might not need to take out a loan to cover an expense down the road.
With this budget in hand, you can more easily see how a potential personal loan payment would fit in with your other monthly expenses, and tell if you have enough income to cover it. This can help you avoid any problems with falling behind on a loan payment before they even begin.
A personal loan can be a great way to consolidate high-interest debt and help keep your budget on track. Visit Credible to compare personal loan rates from various lenders, without affecting your credit score.
After you get a personal loan, you’ll have a required monthly payment — but you can also choose to pay more than that 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 that your personal loan doesn’t include any prepayment penalties. Some lenders charge a fee if you pay off your loan early. The best personal loans have no prepayment penalties.
Autopay is a service that many lenders offer where they’ll automatically take your loan payment out of your bank account on its due date. This will help you avoid missing loan payments. In many cases, you can get a discount on your interest rate by enrolling in automatic payments.
With autopay, you do have to be more mindful of 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 on the due date.
If you have a number of different debt payments due each month, it’s easy for one to slip through the cracks. You may consider consolidating your debts — like credit cards, medical bills, and personal loans — to help you better manage all your obligations. You may even be able to lower the total amount you pay if you can get a lower interest rate on a consolidation loan than you’re paying on average with your current accounts.
A personal loan is a good way to consolidate debt, particularly credit card balances. Personal loans generally have lower interest rates than credit cards, and they can give you a clear end date for when you’ll finally get out of debt.
If you choose to consolidate your debts, 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 when your payments are due. Total up the outstanding balances. This will show you how much you’ll need to borrow to consolidate your debt.
- Check your credit score. Your credit score is a major factor in the interest rate you’ll receive on a personal loan to consolidate debt. The better your score, the 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. Go over the reports and make sure there isn’t any incorrect information, like accounts listed as delinquent that are actually current.
- Shop around for a loan. Request rate quotes from several different lenders. In many cases, you can get a personal loan offer without a negative effect on your credit score. When you get quotes, make sure they offer enough to consolidate all your debts. Find a lender that offers you a low interest rate and a loan term long enough to keep your monthly payment manageable.
- Apply for a loan. When you’ve found the best lender for your situation, it’ll give you instructions on how to proceed with a full loan application. You may need to provide documents that prove your income and assets, like bank statements and pay stubs.
- Use the loan to pay off your debts. When your application is approved, the lender will disburse your loan funds, typically through direct deposit into your bank account. You can use that money to pay off all your current debts. In some cases, your personal loan company will pay them off for you, so ask if your lender offers this option.
- Keep paying your debts until you get word that they’ve been paid off. It’s important not to miss a payment because you thought the debt was being 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 debt or cover another expense, Credible makes it easy to compare personal loan rates so you can find one that best suits your needs.