Game Plan: 4 Ways to Ensure That This Personal Loan Is Your Last

34.3 million.

That's the number of U.S. consumers with a personal loan at the end of 2018, according to Experian.

According to the same Experian study, there are 36.8 million outstanding personal loan accounts in the United States.

"Personal loans are one of the easiest and most efficient ways to get cash in your pockets quickly and responsibly," says Mariel Arraiza, Managing Director, Eloan.com. 

Many people get this type of loan to help consolidate other higher-interest debts although personal finance experts differ when deciding if this strategy is the best way to start on the road to being debt-free. 

While personal loans are a safer, more responsible option than payday loans or playing the lotto to solve your debt problems, it seems like we need to work on being responsible with them after getting approved and getting the money. 

With a goal to make your current personal loan your last, we asked personal finance experts for strategies to help achieve that end. Here's what they said. 

1. Budget, budget, budget

When it comes to financial advice. Joe Toms, president of FreedomPlus has one word for us: "Budget."

"Many people cringe at the word," says Toms, "but it is the number one way to avoid getting in [a cycle of debt, and to get out of debt for good."

Budget before applying 

To utilize your loan wisely, Arraiza suggests, "First and foremost, you need to know what you can afford to pay on a month-by-month basis. If you don't already have a monthly budget, create one before you begin applying for loans. This will let you know how much cash you have leftover each month to comfortably repay a personal loan."

Budget around your goals

"It's important to start by setting goals – and if you're in a relationship and/or have a family, to do so with your spouse and family members," advises Toms. "One goal might be to get out of debt, but other goals might be things like having time to train for a 10K, saving for retirement or taking a vacation. Write down the goals and build the budget around the goals."

2. Consider multiple loan offers

"When determining whether a personal loan makes sense for your financial situation," Lauren Anastasio, CFP and Financial Planner at SoFi, has some advice: "you should consider the upfront costs associated (if any) and whether the fixed monthly payment is something you can afford." 

Research your options

"Once you know how much you can afford to pay on a personal loan each month, the next best piece of advice is to take your time," counsels Arraiza. "Unless you're in a rush to get a loan, there's no reason to rush a financial decision. Do plenty of research and planning, and compare multiple providers against one another."

Shop around

"Remember that you can shop around for the most convenient terms without affecting your credit score, says Arraiza. "Checking your rates is a soft pull and unless you formally submit an application the prequalification normally will not show on your credit profile…"

Work on your credit score

"If you have a low credit score," she adds, "you can also use this time to work on raising your score, so that you can get the best rates possible. While it may be tempting, don't jump on the first loan that you are approved for. Hold out for the one that will benefit you and your financial situation the most.”

3. Evaluate spending behaviors

"The only way to make this personal loan the last one you have to get to climb out of debt is to make changes in how you spend your money," warns Deacon Hayes, founder of Well Kept Wallet. "Some of those changes may be hard to make, but it could be the only way to get real results and stay out of debt for good."

Commit to change

Changing behaviors is hard. 

However, in this case, it is a key component to avoiding debt. Just listen to this story from Anastasio: "I frequently speak to SoFi members who are struggling with debt and are looking to take out a second or third personal loan because they failed to change their behavior when they consolidated their debt onto their first personal loan. It's hard to resist the feeling that comes with watching your card balances go down to zero. Time and time again, I hear from borrowers about their feelings of euphoria when they use the loan to pay off their credit cards and then they start acting like they're completely debt-free."

Becoming debt-free isn't just a one-step process. Even if you have consolidated your debts into one personal loan, it isn't gone. The debt still exists. AND, you still have to pay it. Here are a few ideas how to help adjust your perspective and shift your paradigm so that you can keep your debts in perspective and manage them accordingly

Track all spending

"Once you have a budget, with the personal loan payments included," Toms recommends that you "start tracking all spending every day. It can be surprising to see how much you spend, and on what. Writing it down – just as writing down everything you eat when you are watching your weight – opens your eyes to your real spending patterns, and helps you avoid getting back into debt."

Act like you are still paying off credit card debt

"Anyone using a personal loan to pay off debt should implement the same behaviors recommended when paying off high-interest credit cards (e.g. stop using cards, rely on cash and debit card, reduce spending until debt is gone)," advises Anastasio.

Denise Nostrom, Owner of Diversified Financial Solutions agrees with this mindset. She says, "Taking a personal loan can be a positive experience to eliminate your debt, but you must have a plan to increase your odds of success. You should consider writing down all the payments you make to your current debt and try to pay this amount to the new personal loan. The actual payments to the personal loan may be less due to a lower interest rate, but paying extra to this loan will get you out of debt much quicker."

Keep your debt in perspective and follow this strategy from Anastasio: "It's very important to remember that just because you might not have a number of different debts scattered across multiple banks with a bunch of different monthly payments doesn't mean that you're any less in debt than you were previously. You need to work towards paying your debt off with the same amount of discipline as if you were still being charged a 27 percent APR on a credit card."

Use credit cards wisely

"While a personal loan is easier to manage and the balance cannot go up," says Anastasio, "those who found themselves in credit card debt due to bad spending habits should be careful not to find themselves racking credit card debt back up."

As Nostrom puts it, "The key to keeping out of debt is not using your credit cards." However, she points out that "This is unfortunately not so realistic, so you can use your credit cards, but make sure the purchases you make can be paid off each month. You can become debt-free if you are committed to doing it and have a plan to tackle it." 

4. Dominate your payments

"Personal loans come with a set payment schedule," states Toms. "Most have terms of 36 to 60 months (some, like FreedomPlus, offer 24-month terms, too). The strict schedule keeps people on track to eliminate the debt in a timely way; there is no option to just make minimum payments and be paying back the debt for years and years (as is the case with credit cards)."

So, if your budget has been set up to your advantage, this pre-set, defined schedule should do some of the heavy lifting for you. 

Make all payments on-time

"Once you select the best term and your loan provider, please remember to make your payments on time until the last one," urges Arraiza. "Your payment pattern is a great contributor to build your credit score." With an improved credit score, you will likely be eligible for better loan rates down the road, instead of massive credit card APRs that got you here in the first place. 

Plan payments realistically

"Often a borrower becomes too aggressive with their repayment when transitioning their debt to a personal loan," shares Anastasio. Due to this, consumers "can find themselves without enough money to get them through the month and are inevitably forced to charge expenses to their credit card. 

This will keep the debt cycle going indefinitely. 

Be realistic about what you can afford for a monthly payment and stick to the term that fits your cash flow." 

Consider alternative payment strategies

Jeff Rose, CFP®, and CEO of Good Financial Cents® shares the following "trick" to help avoid a cycle of debt: 

"Pay a partial payment on your loan once a week or once every two weeks, rather than once a month. This helps keep your debt in the forefront of your mind and, typically, you'll save a little more in interest to boot. This frequent reminder that you're working toward being debt-free will help squelch the impulse to buy more things on credit. As a bonus, you may find it easier to send extra money by choosing one thing to go without per payment (such as an extra $10 by skipping the drive-thru one extra day this week).

Important note: Make sure that you confirm how to properly send and have partial payments credited so you've paid the whole amount (or above it) before the monthly due date. Ask your loan grantor for help if the information you're given is at all unclear on how to accomplish this."

Don't jump the gun with autopay

"Stop automatic payments only when the loan is entirely paid off," advises Jacob Dayan, CEO, and Co-founder of Finance Pal and Community Tax. "In many cases, people who are attempting to make their last payments on a loan, see the end in sight of being debt-free, and stop their automatic payment too soon. Meaning, they will neglect to pay the loan in full and begin to receive late notices from a creditor. 

This can ultimately send many borrowers right back into the cycle of debt when having to then pay off late fees. Allowing these late fees to pile up can also negatively impact credit."

Keep payment records

"Keeping a good record of making the final payment on the personal loan can be very rewarding," says Dayan. "Holding a record of paying off a personal loan should be celebrated and these records can be a reminder that you can start living a debt-free life.

Also, many lenders will send an automatic notice, but some might not. It is crucial to ask the lender to send the notice when the loan is paid in full to provide proof in case someone attempts to collect payments in the future."

Make this personal loan your last

Debt-consolidation loans are not a one-size-fits-all solution for all outstanding debts. If you are currently, or plan to use a personal loan for this purpose, you need to have a game plan. It isn't going to just work itself out. This expert advice will help you keep the loan and your debt-free goals in perspective. 

Make this the last personal loan you ever need.