by Dana George | Updated July 21, 2021 - First published on Sept. 17, 2020
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Finding a way to keep up with personal loan payments can save your credit score.
If you find yourself in financial straits and cannot pay your personal loan, you need a plan of action. Here are the steps you should take to address the problem.
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Before you miss a payment, call your lender. It may be the last thing you want to do, but it's essential. Only your lender can tell you about any available options. For example, they may be willing to defer payments for a few months. They may accept a partial payment, forgive the fees, or offer another program to help you get caught up. If your lender does suggest a solution, stick with any deal you make.
Although the call may be uncomfortable, it can salvage your credit score. Missing a single personal loan payment will drop your score. How much depends on your credit history and how you are managing other debt. If your credit score is in the 600s or 700s, it could drop as much as 150 points.
If your lender is not particularly helpful, there are other avenues to explore.
If you have not missed a payment and your credit score remains strong, consider refinancing the loan -- but only if you can afford to make payments on the refinanced amount.
If late or missed payments have already dinged your credit score, consider taking out a secured loan. Most personal loans are unsecured, meaning you provide no collateral. In return for lending money without collateral, the lender charges a higher interest rate. When you provide collateral (such as property or a retirement account), the lender typically offers a lower interest rate. However, if you default on payments, the lender takes possession of your collateral to mitigate losses. Never put anything of value up as collateral if you doubt whether you can make payments. If you are confident your financial problem is temporary and will soon improve, a secured loan is worth consideration.
If you have something of value like a piece of art, jewelry, or a classic car, sell it. The idea is to do whatever you must to stay on top of your personal loan payments. While you're at it, sell anything you no longer enjoy owning. It may be a set of figurines you collected years ago, exercise equipment covered in dust, kids' toys, or a book collection. If you haven't touched it, used it, or admired it in the past six months, consider selling it and putting that money toward your personal loan.
If you have a room to spare, having a roommate immediately lightens the financial load. You not only save on your rent or mortgage payment, your portion of the utility bills also gets slashed. That's extra money in your bank account each month, and extra funds to use for your loan.
Ask anyone who has hit a financial bump in the road about the first step they took, and they're likely to tell you that they trimmed fat from their budget. Here are some of the ways to do that with little effort, if you haven't already:
Cut down on energy costs: Repair leaky pipes, do laundry during non-peak hours, take shorter showers, and turn off lights when not in use.
Save on groceries: Only purchase food you are confident you will eat. Americans dump millions of dollars worth of food each year, particularly produce. Reach for generic products rather than name brands -- buying generic cleaning supplies, paper products, medications, and other staples can save you enough money each month to make a dent in your loan payment.
Put subscriptions on pause: Look through last month's bank statement to locate the services you pay for monthly without even thinking about it. Things like gym memberships, Spotify, Hulu, Amazon Prime, Audible, Netflix, and other subscriptions add up surprisingly fast. Cut them for the time being, and pick them up again if you're still interested after your finances are in better shape.
Even if your lender comes up with such great options that your problem is solved, consider adopting these ideas for the time being. Now is an especially good time to save money wherever possible and work on building an emergency fund. That way, when the next financial storm hits, you'll be ready.
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