How to manage your personal loan and save money

Taking out a personal loan can be a helpful way to consolidate debt or pay extra expenses. People commonly use personal loans to pay for weddings or vacations, finance home renovations or fund large purchases, such as a new vehicle.

Once you take out a personal loan, you’ll have to make monthly payments that include the loan amount, the interest charged by the lender and applicable fees. Making a plan to manage your loan can help you repay your balance faster, saving money in the long run.

Be mindful when budgeting

Taking on a loan payment means adding to your monthly expenses. If you need to make space for the loan payment in your budget, consider minimizing spending on ancillary expenses, such as:

• Eating out.
• Streaming services.
• Gym memberships.
• Extra travel.
• Alcohol.
• Monthly subscription services.

Your debt-to-income ratio (DTI) calculates the amount of debt you have versus how much money you make. It’s generally considered good practice to have a DTI of 36 percent or under to increase your approval odds.

Set up autopay

When setting up payments for your personal loan, you often have the option to set up automatic payments. This means the payments will automatically be drawn from a specified bank account or credit card at the same time each month.

Setting up autopay can be helpful as it saves you the trouble of remembering to make monthly payments. Also, lenders may offer an autopay discount upon enrolling, which can help save you money in interest over the life of the loan.

Paying any extra money towards your personal loan will help you pay off your debt faster. Additionally, paying off the loan early means you won’t pay as much interest and the loan will cost you less — as long as there aren’t any prepayment fees.

Add money to your monthly payment

Making slightly larger monthly payments is a surefire way to see your balance decrease faster. It will reduce the amount of interest you pay. It doesn’t matter how large or small your extra payment is. Even adding a small amount to your monthly payments can make a significant difference.

Make bi-weekly payments instead of monthly

Some lenders will allow you to set up bi-weekly payments instead of making one monthly payment. Your monthly payment amount will be split in half and charged every two weeks. While it may not seem like you’re doing much, adding an extra payment each year can help you reduce your total interest accrual.

Pay a lump sum amount

A lump sum is a larger payment made once and is generally much bigger than your normal monthly payment. If you receive an unexpected chunk of change, like a raise or a large tax return, making a lump sum payment may be financially and psychologically beneficial.

When you make a lump sum payment, your monthly payment amount will stay the same, but it will reduce the interest you pay over time.

Consider consolidating

Consolidating multiple high-interest loans into one loan with lower interest rates can help you pay off debt in a shorter time. “It’s a good idea to consolidate personal debt like credit card debt when you have multiple credit card debts over 10k and you’re having trouble paying the principal due to high interest rates,” Dvorkin says.

While consolidating is a great tool for some, it’s not a one-size-fits-all solution. There are times when consolidation is an ideal loan management tool, like if you’re just looking to simplify your monthly payments. There are also scenarios in which refinancing may not be the best idea. To mitigate potential risks, calculate the difference that consolidating could make to your monthly payments and if you’ll pay less overall.

When not to consolidate

If the debt consolidation loan comes with a higher interest rate than your current accounts, you won’t save any money, and it likely won’t make sense to consolidate. To make sure you’re getting a competitive rate, prequalify for as many lenders as possible.

Plus, if the new loan comes loaded with fees — including origination and prepayment fees — they can add up quickly and detract from the overall value of your loan. Read the fine print before signing a new loan agreement to make sure you’re not taking on hidden fees.

Refinance

Refinancing a personal loan involves working with a new lender to get a loan for your remaining loan amount with lower rates or different payment terms. Much like consolidating, refinancing can save you money by reducing the amount you pay in interest over the life of the loan.

However, if the fees that come with refinancing are high, they’ll eat into the value of your loan and it may not be worth it. Additionally, if the repayment term with the new loan is longer, you may pay more interest over time.

Calculate the amount you will spend on the remaining payments with your current loan versus the new loan to determine if the cost of refinancing is worth it for you.

Is now a good time to refinance a personal loan?

The Federal Reserve has raised rates multiple times throughout the last two years with the aim of cooling off the inflated economy. As of April 2024, the current average personal loan rate is at an all-time high of 12.18 percent.

Due to the high rate environment, right now is likely not the best time for most borrowers to refinance. However, if the interest rates on your existing loans are high and you prequalify for a lower rate, then it may be worth it.

Alternatives ways to save money on your loan

If you don’t qualify for the traditional management methods or don’t wish to undergo the borrowing process again, there are other ways to save money on your personal loan overall.

• Talk to your lender. See if you can adjust your terms or get a lower interest rate. “On-time payments, a good credit history and other factors like this can help in this process,” Dvorkin says.
• Open a balance transfer credit card. These cards allow you to transfer debt with minimal fees. Plus, it’s common for issuers to offer an interest-free promotional period.

The bottom line

There are multiple ways to manage a personal loan well and save money along the way. Remember that no amount is too small — any extra amount you can put toward your monthly payments will be beneficial. Consider all of your options throughout the entirety of your loan.

You may not be able to consolidate or refinance right now and score a lower rate, but that doesn’t mean that the method won’t make sense in the future. As your financial and credit health evolve, so do your repayment methods. That being said, keep all of your options in mind until the day you pay the balance off to optimize your money-saving potential.