How to Manage Your Personal Loan

From pre-qualifying to getting funded, taking out a personal loan can be pretty painless, with many lenders offering smooth online applications and same-day funding.

Managing a personal loan successfully, however, requires understanding how the payments change your monthly budget and creating a clear plan to pay off the loan.

Here are some things you can do to make your personal loan easier to manage.

It’s important to know how much money you’ll have left after each monthly payment. You don’t want to get a loan without a clear picture of its impact on your monthly cash flow because overextending your finances could lead you to take on more debt to make up for it.

Some people use a budgeting app to track their spending, while others prefer a spreadsheet or another money-tracking system.

NerdWallet recommends the simple 50/30/20 budgeting plan, in which you spend 50% of your earnings on necessities, 30% on things you want and 20% on debt repayment and savings.

Unless you’re consolidating debt and sending the money directly to your credit card issuers, keeping the loan funds in a checking account is best for easy access.

Withdrawing from a checking account is most straightforward because there are no tax implications, as there may be with a retirement account, or withdrawal limits that a high-yield savings account would have.

Whether you should keep the money in a separate checking account depends on when you plan to spend it and how easily you can mentally divvy up the balance between what you can and can't spend.

It can be psychological, says Tess Downing, a San Antonio-based financial planner. For some people, it’s just easier to see large payments come out of an account they don’t also use to buy groceries.

When Downing took a home equity loan to build a pool at her home, she says she kept the loan money in a separate bank account so when the first payment came due — 25% of the project’s cost, Downing says — her everyday checking account didn’t take the hit.

It comes down to your preference, she says, “and maybe just your own discipline.”

» MORE: Find the best checking account

Many lenders offer rate discounts between 0.25 and 0.5 percentage points to borrowers who set up automatic payments, which can drop payments by a few dollars each month.

Perhaps more importantly, automatic payments help you avoid missed payments — which often result in late fees — and make paying your monthly bills effortless.

If you have multiple sources of debt, you can simplify your repayment plan with a balance-transfer credit card or debt consolidation loan. Consolidation combines your debts together under one monthly payment at one interest rate.

Consolidating only makes sense if you can get an interest rate that’s lower than the combined rates on your existing debts.

» MORE: Should you consolidate your debt?

If your credit score or debt-to-income ratio was less than ideal when you applied for your personal loan, there may be opportunities to refinance the loan at a lower rate once your financial situation has improved.

For example, if you’ve been making on-time payments toward a loan for a while and your credit score has improved, you might qualify for a lower rate, which can save you money on interest.

Refinancing involves taking out another loan to replace your current one, so make sure the savings outweigh the costs. If your new loan extends your repayment period, for instance, you could wind up paying more interest over time.

» MORE: How to refinance a personal loan

As you near your final payments, it can be tempting to pay the loan off quickly, but take a moment to weigh the pros and cons. While it may feel satisfying to get rid of your debt, wiping out your savings to do so could put you in a worse position. Consider whether the money you’d use to pay off your debt early could be better used in another way.

Prepayment fees are rare in personal loans, but it’s a good idea to review your loan contract if you’re thinking of paying off your loan early. If your loan comes with this fee, consider whether the amount of interest you would accrue by waiting for the end of the loan’s term is higher than the amount the prepayment fee would cost.