The simplest tasks can get complicated quickly without proper planning. That’s true of everything in life, including the repayment of a personal loan. The transactional portion of it is the easy part. The complexity comes into play during planning, budgeting, possible refinancing, and contemplating early repayment. We’ll cover each of those topics in this article.
Planning and applying for a loan
Getting a personal loan for the right reasons makes repaying it less of a burden. This is the planning stage of the process. You might need money for a major purchase, an unexpected expense, or to consolidate debt. Figure out how much you want to ask for, and then shop around to different lenders. Ask about interest rates, terms of their loans, and fees.
Approval for an unsecured personal loan will be based primarily on your credit score and credit history, so check your score and try to improve it a bit before submitting your loan application. This can be done by paying down any existing debt. “Amounts Owed” is a primary variable used in calculating your credit score, so this is an area where you can be proactive.
Budgeting your money for on-time payments
Before signing off on the personal loan agreement, ask yourself if you can afford the monthly installment payments, then do the math to make sure you’re being truthful with the answer. Many of us tend to “estimate” what we can afford rather than create a budget that provides actual data on income and expenses. This is a step you don’t want to skip.
Going back to credit scores, FICO weights “amounts owed” as 30% of your overall score. “Payment History,” which is your record of making payments on time, is weighted at 35% of your score. Entering into a personal loan agreement without first checking your budget could put you in jeopardy of missing payments. That will lower your credit score.
Refinancing when it becomes available
When we were children, we frequently asked for “do-overs.” Most things in life don’t work that way, but there are a few exceptions. Refinancing is the financial equivalent of a “do-over” for your personal loan. It’s a chance to get a lower interest rate and more affordable monthly payment. That’s worth looking into if the opportunity arises.
Another way to refinance is to shorten the loan term and increase monthly payments, so it gets paid off faster. This will ultimately save you money on interest payments, but it puts a strain on your monthly budget. Make sure those higher payments are affordable if you opt for this choice. Taking on too much could cause unmanageability in other areas.
Choosing the early repayment option
Paying your loan off early may seem like a great idea, but it might not be. Some lenders charge an early repayment fee. Others won’t allow it at all. This is something to review early in the loan process when you’re planning and budgeting. If you don’t see the language on early repayment in the loan agreement, ask your lender about their policy and procedures around it.
The Bottom Line
There are several ways to repay a personal loan. Chances are you thought repaying your personal loan was simple. Making the payments is, but there are several options for doing that. You can simply pay the monthly installments on time until the loan is paid off, or you could try refinancing or early repayment. Either way, planning, and budgeting are essential to your success. Take your time and do it right.
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