You’ve done all your research about applying for a personal loan and the documents you need to present. You also know exactly how much you can afford to pay every month. It is likely that you feel pretty confident that you will qualify for the loan and get a decent interest rate. There are still a few more logistical things to think about. Here is what you need to know about repaying your personal loan.


1. Set up Reminders to Pay Your Bill

Keep a recurring reminder on your calendar, phone, or email to pay your monthly installment at least 5 days before the actual due date. When the reminder pops up, pay it. Do not procrastinate or put it off for another day. This is one payment you don’t want to miss.

2. Set up Auto-debit

If this is an option, convert your monthly installment into an auto-debit transaction. This means that on a specific date every month, ideally 5 days before in case of a problem, your money will automatically be deducted from your account and pay your bill. This is not a set-it-and-forget-it solution. It will be your responsibility to make sure your account has enough funds to pay your monthly installment before the account is debited.

3. Know Your Late Payment Penalty

If you miss one payment, you will incur a penalty. Some banks charge a flat fee, which is preferable. Others are a bit more strict and charge a percentage of the outstanding balance as the late payment fee. On the other hand, some banks may even charge a flat fee and then increase your interest rate. Additionally, many banks will increase your loan tenure by as many installments that you skipped. Unfortunately, along with the late payment charge, a longer loan tenure would actually increase the total you must pay back to the bank in interest. As a result, missing one payment can really cost you.

4. Early Repayment Fees

If you make additional repayments, you could shorten the term of your loan and thereby decrease the total amount you would actually have to pay. Banks charge early repayment fees because they actually lose money when you pay off your loan early. Lenders earn their profit by keeping you in debt for a longer period of time, constantly accruing interest every month. By paying your loan off earlier, you actually reduce the number of interest payments, consequently reducing the bank’s profit. Find out what the early repayment fee is and calculate how much you could save in interest if you can afford to pay it off earlier. In some cases, even with the penalties, it may still save you money. If it makes sense, consider weekly, biweekly, or even monthly repayments. Once you are close to paying off your loan, contact your lender to get a final payout estimate. You want to ensure that the loan is closed and you won’t be charged any unexpected additional interest.

5. What Happens If You Can’t Make Your Repayment

If you are struggling to make a repayment, you should contact your bank or lender. Some banks, like HSBC, are expansive enough that they have banking services to help you through financial difficulty, provide temporary relief from repayments, and offer an in house Debt Relief Program (DRP). If it is a temporary set back, they may defer payment for a month or work with you on a solution. Of course, you may be charged extra interest on top of this and your loan tenure will likely be extended. However, this is still the best option instead of simply missing your monthly payment.

Upon 30 days after your first missed payment, a lender may report this to the credit bureau. Unfortunately, three missed payments automatically put your loan account in default and have definitely lowered your credit score by then. This default will be recorded in your credit report for at least 3 years, possibly indefinitely. Following your default, the bank will pursue legal settlement. If there weren't any collateral involved when you took out the loan, the bank may pursue legal action to seize your bank accounts. If it is an option, you should agree to settle at a negotiated amount. You will end up paying less than what you would currently owe. Settling with the bank would thereby close the loan account.

It will take a while to get back on your feet after all this. Your credit score will be low, your credibility would be severely impacted for future loans, and you may be out of assets because of the settlement. This may even impact your ability to get a new job. Some companies ask to see your credit report before hiring you. This is because your credit rating can demonstrate how diligent you are with your finances and deadlines as well as your decision-making skills. However, this black mark on your credit report is only temporary. You will be able to rebuild your credit over time. Be sure to take steps to avoid being in the same situation in the future. At times, things are beyond our control, such as the loss of a job. Therefore, it is always wise to have an emergency fund for such an occasion, to budget properly to afford any future financial commitments, such as the case with a credit card or a personal loan, to cut down on expenses and to avoid living beyond your means.

Final Thoughts

A personal loan is extremely convenient, can be a lifesaver, and is easy to obtain. In fact, you can apply online right now and be approved in a few hours. However, most personal loans are unsecured and therefore automatically come with a higher interest rate. It is almost too easy to miss a payment and then be set back in a cycle of debt and compounding interest and late penalties. The first step, after budgeting well for the monthly installment, is to remember to pay the bill. This means securing the funds in your account, setting up auto-debit, and payment reminders to make sure everything has successfully been paid every month. A personal loan is a considerable responsibility, but it is short-termed. In fact, if you can, after weighing the early prepayment fees, pay off your loan as quickly as possible. Get out of debt!