A personal loan can be a great way to finance a large purchase or pay off debt. However, it's important to service your personal loan responsibly to avoid falling back on payments and damaging your credit score. Here are a few tips for effectively servicing your personal loan.
Pay More Than the Minimum Monthly Payment
Once you take out a personal loan, you'll be required to make monthly payments until the loan is paid off. Your personal loan statement will list the minimum monthly payment you're required to make, but it's in your best interest to pay more than the minimum.
Making only the minimum payment will increase the amount of interest you pay over the life of the loan. It could also take longer to repay the loan if you only make the minimum monthly payment.
That's why you need to pay more than the minimum monthly payment. You can make bi-weekly payments or pay a lump sum when you get your tax refund or bonus at work. These extra monthly payments can make a big difference in the amount of interest you pay and the length of time it takes to pay off the loan.
In addition, making more than the minimum monthly payment can help you during difficult financial times. For instance, suppose you lose your job and can't make your personal loan payments for a few months. If you've been making extra monthly payments, you'll have built up a cushion of money that you can use to make your personal loan payments during these tough times.
By paying more than the minimum monthly payment, you'll be able to pay off your personal loan faster and save on interest.
Keep the Loan Term as Short as Possible
Personal loan terms can range from 12 to 60 months. A longer loan term could result in lower monthly payments, but you'll pay more interest over the life of the loan. Conversely, a shorter loan term could have higher monthly payments, but you'll pay less interest overall.
For example, suppose you take out a $10,000 personal loan with a 4.5% interest rate and a 60-month term. Your monthly payment would be $229, and you would pay $2,758 in interest over the life of the loan.
Now, say you take out the same personal loan but with a 36-month term. Your monthly payment would be $313, but you would pay only $1,290 in interest over the life of the loan.
As you can see, a shorter loan term will have higher monthly payments. However, you'll save on interest by keeping the loan term as short as possible.
For more financial information, reach out to a local service, such as Time Finance Inc.
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