How a personal loan helps you save money
This is the fastest growing type of loan and could help you save money and improve your credit score.
Here’s what you need to know about personal loans and how they can benefit you.
What is a personal loan?
A personal loan is an unsecured loan typically for $ 1,000 to $ 100,000 with a fixed interest rate that can be used to consolidate debt or make a large purchase. The term “unsecured” means that you do not have to provide a guarantee.
Depending on your credit profile, you may be able to qualify for a low interest personal loan and save money compared to a credit card. Interest rates on personal loans are often much lower than interest rates on credit cards, which typically range from 10% to 20% (or more).
The interest rate on your personal loan will depend on several factors, which can include your credit rating, credit history, monthly cash flow, and debt-to-income ratio.
The stronger your credit profile and history of financial responsibility, the lower the interest rate you can expect.
When to use a personal loan?
Personal loans are best for purchases that you plan to pay off in less than five years.
Unlike student loans or mortgages which are spent on specific purchases such as an education or a house, respectively, personal loans can be spent at your discretion.
Hence, you have more flexibility and personal choice when using a personal loan.
1. Debt Consolidation and Credit Card Debt Consolidation
Debt consolidation is one of the most popular – and smartest – reasons to get a personal loan.
There are two main ways you can use a personal loan for debt consolidation:
- Pay off existing high-interest debt (like credit card debt) with a lower-interest personal loan
- Combine different types of existing debt into one personal loan to make debt repayment more organized and manageable
You can use a personal loan to consolidate high interest credit card debt and get a lower interest rate to help you pay off your debt faster.
Of course, this assumes that you will take advantage of the lower interest rate and lower monthly payments to speed up your credit card repayment.
- USE a personal loan to pay off your credit card debt and get debt free.
- DO NOT use a personal loan as a tool to defer debt repayment.
How a personal loan can reduce your credit card interest by 50%
Here’s how to reduce your credit card interest rate by up to 50%:
1. Compare the interest rate on your credit card with the interest rate on the personal loan to determine which interest rate is lower.
2. If you have good or excellent credit, you should be able to earn an interest rate that is lower than the current interest rate on your credit card.
3. If you have a lower interest rate, make sure you can repay the personal loan over the life of the loan (like five years, for example). Having a shorter term loan repayment period can not only save you interest charges, but also instill the discipline to pay off your debt faster.
You can use this credit card consolidation calculator to see how much money you can save with a credit card consolidation loan.
Are there alternatives to the personal loan?
There are several alternatives to the personal loan. For example, if you have good or excellent credit and plan to pay off your existing credit card debt in 12-15 months, you can get a 0% APR rate credit card and make a balance transfer.
If you own your home, a home equity loan is usually a less expensive option. However, unlike a personal loan, a home equity loan is a secured loan, which means your home serves as collateral and can be claimed by the lender if you don’t pay off the debt.
How a personal loan can improve your credit score
Can Borrowing Debt Really Improve Your Credit Score?
Surprisingly, yes. Here’s how.
Lenders assess your credit card usage or the relationship between your credit limit and your spending in a given month. If you have credit card debt and your credit usage is too high, lenders may see you as a higher risk.
Here are some ways to manage your credit card usage:
- set up automatic balance alerts
- ask your lender to increase your credit limit (this may involve a high demand for credit, so check with your lender first)
- rather than paying off your balance in one installment at the end of the month, make multiple installments throughout the month
You can also use a personal loan to help you use your credit. For example, you can improve your credit score if you replace credit card debt with a personal loan.
Why? A personal loan is an installment loan, which means that a personal loan has a fixed repayment term. Credit cards, however, are revolving loans and do not have a fixed repayment term. Therefore, when you swap credit card debt for a personal loan, you can reduce your use of credit and diversify your types of debt.
2. Medical expenses
If you have a medical emergency or unforeseen medical expenses and are unable to pay the full cost in cash up front, a personal loan may be a better solution than a credit card.
Often times, you can qualify for a larger loan amount with a personal loan than a credit card, which may be necessary for your health expenses.
3. Emergency home repair or home improvement
If you need emergency home repairs or a small home improvement project and you can’t take out a home equity loan, access a line of credit, or refinance your mortgage, a personal loan may be a great option. .
A personal loan can make financial sense for a home improvement project if the renovation improves the financial value of your home (and the cost of borrowing the personal loan is less than the expected appreciation of your home as a result. of the renovation project).
4. Other uses for a personal loan
A personal loan can be used to help pay for other key life events including engagement ring, wedding, move, honeymoon, and many other uses.
As with any debt obligation, consider whether your reason for obtaining a personal loan is a “want” or a “need”.
Final thoughts: personal loans
With the increase in online loans, the good news is that you can apply for and receive personal loan money within days.
However, a personal loan should not be an excuse to take on more debt. On the contrary, a personal loan can be a useful tool for a smart borrower who has a plan of action to get out of debt and start on the road to financial freedom.