Managing Personal Loans With Monthly Payments

Personal loans offer the predictability of fixed interest rates, fixed monthly payments, and a set repayment plan, which is why many consumers choose them over credit cards and lines of credit. If you're looking for loans you can pay back monthly, read on to learn how personal loans work, how to manage them, and some alternatives to consider.

What Is a Personal Loan?

A personal loan is a type of loan that is typically unsecured, although secured personal loans also exist. Either way, personal loans let consumers borrow money and pay it back on a monthly basis. The loan funds are given as a lump sum of cash upfront.

Personal loans also come with fixed interest rates, and they include a set repayment period that will not change. This means these loans also offer fixed monthly payments that stay the same throughout the life of the loan.

Managing a Personal Loan

Because payment history makes up the largest individual component of your credit score, the most important aspect of managing a personal loan is making sure all monthly payments are made early or on time. While on-time payments can help you build credit and improve your score over time, late payments can have a dramatic negative impact on your credit score that takes months or years to overcome.

Other steps involved in properly managing a personal loan include making sure loan payments fit into a monthly budget or spending plan, in addition to avoiding the temptation to over-borrow just because you can.

Most personal loans last from one to seven years, although you can typically pay these loans off early without any prepayment penalties. With that in mind, it can help to make extra payments toward a personal loan if you can afford to, and if doing so doesn't hold you back from achieving other financial goals.

How Do People Use Personal Loans?

Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

Alternatives to Personal Loans

If you're thinking of getting a personal loan but are also wondering about other financing options, consider these alternatives:

• Credit cards: Credit cards come with variable interest rates, monthly payments are based on how much you borrow. Some credit cards also offer sign-up bonuses for reaching a spending threshold within the first few months, in addition to ongoing rewards for each dollar you spend.
• Home equity lines of credit: Home equity lines of credit (HELOCs) let you borrow against the equity in your home with a variable interest rate. Your monthly payment is based on how much you borrow, and HELOCs come with a draw period where you can borrow money and a repayment period where you cannot.
• Home equity loans: Like personal loans, home equity loans come with fixed interest rates, fixed monthly payments, and a set repayment schedule. These loans are also secured by the equity in your home.

How to Apply for a Personal Loan

Personal loan options can be accessed online and from the comfort of your home. Steps involved in applying include checking your credit score, calculating your borrowing amount and monthly payment, comparing loan companies, and filling out the loan application.

Check Your Credit Score

The best personal loans are geared to individuals with high incomes and good or excellent credit, which is why you'll want to know where you stand before you apply. Fortunately, there are many places to check your credit score for free, including Credit Karma, Credit Sesame, Capital One's CreditWise service, and more.

Compare Loan Companies and Rates

Look at the top personal loan companies and what they have to offer in terms of loan amounts, interest rates, and fees. Make sure to keep an eye out for hidden fees that these companies may charge as well, including administrative fees or origination fees.

Get Pre-qualified Online

Some lenders let you "check your rate" and get pre-qualified online. This step only requires you to submit some basic information about yourself like your name, address, and last four digits of your Social Security number (SSN). From there, you can find out the rate you might pay and how much you may be eligible to borrow.

Apply for a Loan

Once you find a loan offer you're happy with, the following steps can help you apply for a personal loan.

• Step 1: Submit a loan application online: Fill out the loan application with your personal and financial information, including your name, address, SSN, employment information, and income details.
• Step 2: Upload documentation: Most loan companies will require you to upload proof of identity, such as a photo of your driver's license. Other documentation you may need to submit includes pay stubs and tax returns.
• Step 3: Receive a decision: Some personal loan companies will reach a decision on your loan in as little as an hour, whereas others may request additional information. Either way, you should find out whether you are approved for a loan within a few business days at most.
• Step 4: Get funded: Most of the time, personal loans are funded through an ACH transfer directly to your bank account. Where some lenders provide funding as soon as the next business day, others take several days to move your loan funds into your account.

What to Know About Personal Loan Repayment

As you can see in the chart above, different lenders offer different term lengths that borrowers can choose from when they apply. For example, it's possible to borrow money and pay it back over 12 monthly payments if you want to pay down debt fast. Meanwhile, personal loans with low monthly payments can sometimes last up to 84 months or even longer.

Ideally, you'll find a personal loan with a repayment term, interest rate, and monthly payment that fits with your lifestyle and your budget. It's worth keeping in mind that loans with high interest rates can be considerably more expensive over time—particularly if they come with a long repayment term.

As an example, borrowing $15,000 at 21% annual percentage rate (APR) for 12 months requires a monthly payment of $1,396.71 and total interest charges of $1,760.48. If you pay the same loan amount off over 60 months at the same rate, however, you'll pay just $405.80 per month, but you'll also fork over total interest charges of $9,348.02 over that time.

Repayment Terms

The additional interest charges that add up when you borrow money over a longer timeline can be avoided by choosing a shorter repayment period to begin with. However, personal loans that last 12 to 36 months come with much higher monthly payments than those that last 60 to 84 months, and it can be difficult to commit to a larger payment, even for just 12 to 36 months.

With that in mind, it's important to make sure you can pay your loan off early without any prepayment penalties. Doing so gives you the flexibility to pay more than the minimum payment on the loan when you can afford to, without committing to a higher payment for the long haul.

In the example above of a $15,000 loan at 21% APR with a 60-year term, we mentioned how total interest charges over that time add up to $9,348.02. If you opted to pay an extra $200 toward this loan each month instead of only the $405.80 required minimum payment, the loan's term would be shortened by two years and three months and you would save $4,514.74 in interest along the way.

Is a Personal Loan Right For You?

Personal loans offer a way to borrow money without collateral in most cases. They also come with set monthly payments, fixed rates, and a fixed repayment schedule that lets you know exactly when you'll make your last loan payment. This makes them a good option for people who want to borrow a specific amount of money for a set time period and make fixed monthly payments without any surprises.

The Bottom Line

Personal loans are loans that you pay monthly that let you access cash when you need it. Provided you borrow only as much as you need and always make payments on-time, these loans can help you learn positive financial habits while improving your credit score over time.

Before you apply for a personal loan, you'll want to compare lenders based on loan amounts, rates, and fees. Doing so can help you identify lenders that offer loans with the best rates and terms, which can help you save money over time.