If you’re trying to determine what’s the best personal loan repayment option out there, you aren’t alone. The task can be daunting because of how many types of repayment terms exist.
Let’s review the most common personal loan repayment options to help you choose the ones that work for you best.
Fixed repayment options
Fixed interest rate
Fixed-rate repayment terms mean the interest rate is predetermined by the lender based on numerous factors, such as your credit score and income. Throughout the life of your personal loan, the interest rate won’t change.
The most common type of loan repayment schedule has the borrower making regular monthly payments until the loan tenure is over. If you miss a few months of payment, your loan might be considered delinquent and reported to credit bureaus, hurting your credit score. A delinquent loan is at risk of going into default.
You may be able to opt for weekly (or bi-weekly payments) instead of monthly. Since you make more frequent payments this way, it’s possible to finish repaying the loan faster. This could allow you to pay less in interest.
For personal loans, amortization refers to when regular payments are used to pay off your debt. For example, your loan terms may come with an amortization of 5 years, which means you need to pay it off by the end of the 5 years.
In the amortization of loans, the periodic installment amounts are calculated by considering factors such as your interest, loan principal (the amount you borrowed), and how long your loan tenure is.
Variable repayment options
Variable interest rate
A variable-rate personal loan uses fluctuating interest rates over the life of your loan. Variable interest is typically based on the Federal Reserve prime rate, which changes based on current market conditions and other factors.
Variable-rate loans are more unpredictable than fixed-rate loans because each payment you make is different. The disadvantage of a variable interest rate is that it creates uncertainty about precisely how much of your budget you should allocate toward loan repayment each month.
The advantage of using a variable interest rate is that it more accurately reflects how much interest you should be paying depending on the economy and at times, you can save money on your monthly payments.
Flexible payment plans
Some lenders may allow more flexibility in your repayment plan. The terms of repayment can be adjusted based on your financial situation.
If you find yourself struggling to comfortably make your monthly payments, it could be a good idea to approach your lender and tell them you require some lenience in your loan repayment, at least temporarily. Proactiveness may show the lender your willingness to repay the loan, and they can grant you some sort of assistance.
Are fixed or variable loans better?
Fixed interest rate loans are usually better in the long run if you obtain a larger loan amount that takes numerous years to repay. The unchanging interest rate provides you with budget certainty. However, when you apply for a loan, the fixed interest rate is almost always higher than the variable interest rate.
Meanwhile, if you are approved for a short-term loan, you might prefer a variable interest rate. This is because the variable interest rate is unlikely to fluctuate significantly over the loan tenure, so you have a good idea of how much to pay each month. Since variable interest rates tend to be low at the start of your loan term, you can quickly pay the small loan off and have peace of mind.
Every borrower faces their own challenges and reasons for taking out a loan. Consider your interest rate, initial ability to make monthly payments, and employment status to see what kind of personal loan repayment options might best suit your situation.
Balloon payment repayment options
Your monthly payments remain the same if you have chosen a balloon payment option. However, at the end of your loan tenure, you will be expected to make one large payment to pay off the rest of your debt in one go.
The benefit of a balloon payment is that you can reduce the cost of monthly payments. However, there is also a risk because it doesn’t lower your entire debt amount, merely how much you pay each month. The reduced monthly charges don’t necessarily mean you can save money in the long run.
If you want to opt for a balloon payment option, make sure that you are prepared for a larger-than-usual payment at the end of your loan tenure.
Interest-only repayment options
Unlike regular loan payments, interest-only payments don’t cover the loan principal. All of your periodic payments will only go toward the interest and not the original loan amount.
Interest-only repayment periods usually last for a few years and are granted to homebuyers seeking mortgages.
If you anticipate difficulties making your monthly payments at the beginning of your loan, an interest-only repayment period can help you reduce your monthly payment amounts. This could enable you to more comfortably manage the monthly payments.
However, there are serious downsides that can come with interest-only repayments. Until you finish this period of interest-only payments, you won’t be making much progress in repaying your principal loan amount. This delay can result in you paying significantly more–potentially double or triple.
- Benefit: Monthly payments can be hundreds of dollars cheaper for the first few years
- Downside: You end up paying more in the long run
Principal plus interest repayment options
A loan with principal plus interest repayments will have you making payments that cover both the principal (original loan amount) and the interest at the same time.
If you pay more towards your principal each installment, you can reduce the amount that you need to pay in interest over the life of your loan. That is why most personal loans operate on a principal plus interest repayment basis.
Automatic payment deduction repayment options
Automatic payment deductions give permission to lenders to take your payments directly out of your bank account. Setting up autopay can be a great convenience, but it’s not for everyone.
Choose a recurring day each month that you think works best for your financial situation if you set up autopay. Many borrowers who set up autopay benefit from picking a date that is after when they receive their paycheck.
Even if your lender doesn’t offer an autopay option, your bank or credit union might enable you to set up automatic, recurring payments that help you make your payments like clockwork.
Here are some of the advantages and disadvantages of automatic personal loan payments.
- You won’t miss any payments as long as you have enough money in your account
- You can save time and mental energy
- Automatic, regular payments can help you improve your credit score
- Some lenders may grant you a discount, such as a small interest rate discount
- You risk overdraft fees if you don’t have enough money in your bank account
- Your credit score may be damaged upon lack of funds
- You have less control over the payment
Is autopay safe?
Yes. Generally, you don’t have to worry about your account or personal information being leaked if you decide to use autopay.
When deciding whether to use autopay, check to see if your lender offers any incentives. Some lenders offer discounts and will agree to lower your interest rate if you set up autopay.
If you’re worried about not having enough funds each month to successfully afford the automatic payments, autopay might not be the optimal choice for you.
Some lenders impose a prepayment penalty if you make early payments. Prepayment penalties can come in a steep fee, from around 1 to 3 percent of your loan amount.
When deciding on your loan, you may wish to try negotiating down the prepayment penalty to get more favorable terms if you anticipate yourself making early payments.
Compared to the past, prepayment penalty fees are less common. It is possible to find a lender who offers favorable terms without any prepayment penalties. As always, make sure to review the fine print on your loan agreement so you won’t be caught off guard by unexpected charges.
Late payment fees
If you’re running behind on your personal loan repayment schedule, you can expect to incur late fees. These late payment fees can either be a flat fee of $20 to $50 or a small percentage of your monthly installment.
On top of late fees, your credit score can take a hit if you’ve missed a personal loan payment. If your loan is secured by collateral, you also carry the risk of losing your pledged assets soon if you don’t catch up on your payments.
One way to avoid late fees is to set up automatic payments with your lender so that they can directly take payments out of your bank account every month.
If you find yourself making late payments very frequently, it might be worth communicating your financial difficulties with your lender to procure a loan modification. The lender might be willing to delay your repayments temporarily, extend the length of your loan, or otherwise offer some sort of loan relief.
Fortunately, many loans have a grace period. If yours does, it means you get a period of time after missing a payment during which you won’t incur any penalties. No late fees, no negative credit score impact, and no cancellation or default of the loan.
Note that a grace period is _not _the same as a deferment. A loan deferment allows you to stop making payments for a while due to reasonable excuses, such as financial hardship.
The grace period is usually 15 days or two weeks. After that, your repayment is officially considered late.
Loan modification repayment options
A loan modification occurs if you change your loan terms. Loan modifications are typically only granted if you’re undergoing a crisis and cannot repay the loan under the current terms. Modifications can entail:
- Extending the length of your loan
- Reducing the interest rate
- Changing the type of the loan
Since changing the loan terms could help you avoid a loan default situation, it could be beneficial to you if you’re having trouble making payments on time and are worried about defaulting.
A loan modification is most commonly seen in mortgages, which are secured loans used to finance property purchases. If you want a loan modification, you need to ask for one from your lender and go through the application process.
The loan application process may require you to provide your financial situation, details of your crisis, why you need a loan modification, and other pertinent information.
Personal loan repayment FAQs
What is the best loan repayment option?
The best one will depend on your individual situation–there is no one-size-fits-all personal loan repayment option. Review your options and shop around to see the terms and conditions of different lenders.
What happens if I miss a personal loan payment?
Try to make the payment as soon as possible. Contact your lender proactively if you foresee yourself having trouble making payments, as you may be able to minimize the consequences and receive temporary debt relief.
Some personal loan terms offer grace periods. If you go past the grace period, you will incur late fees and credit score penalties.
Is it good to pay off your personal loan early?
It depends on what your loan’s prepayment penalties are. Review your loan terms to see whether you are charged more for making early payments and see whether you will save money by paying the debt off early.
How long does it take to repay a personal loan?
Loan tenures usually range from 12 months to 5 years. In general, the greater the loan amount you obtain initially, the longer you have to repay the loan.
Personal Loans Company Reviews
Recently Updated Articles