3 Smart Ways to Use a Personal LoanBy Caitlin in Loans
Debt is a scary thing and most of the time we discourage you from having too much of it, but there are some situations where having debt is OK. Strategic debt is when you’ve thought about, and decided that, being in debt will help your financial situation in the long run. There are all kinds of ways to go into debt but it’s important that you choose the best kind for you. Most people would choose a credit card as it’s probably the easiest to get, but it’s also the easiest to misuse and overuse and could potentially make your situation worse. Taking out a small personal loan from a private lender is just as easy as applying for a credit card but you’ll be able to use it to help your current financial situation instead of creating a worse one.
Here are 3 smart ways you can use a personal loan to help save money, pay off debt and build a better financial future for yourself.
1. Save Money with Better Interest Rates
If you currently have a high interest loan or credit card and are having trouble making the payments or think you’ll never be able to get on top of the debt and actually pay it off then you should consider getting a personal loan to help. If you can qualify for a personal loan that has a much lower interest rate than a current credit card or loan you will save more money than you think.
Apply for a personal loan and see that kind of interest rate they offer you, if it’s lower than your current rate take the loan and pay off the that credit card or high interest loan. You’ll be saving hundreds of dollars a year, which you can use to pay off the personal loan.
2. Reduce Credit Card Debt
Here’s the situation: you charge something pretty expensive to your credit card but tell yourself that you’ll pay it off as soon as you get your next paycheque, but that of course that never happens and you’re still making minimum payments months later. This happens all the time, credit cards make it so easy to spend and forget and then all of a sudden you’re stuck in the cycle of making minimum payments. Debt can drag on for years this way and usually the end is impossible to see. In contrast, a personal loan has an ending, a last payment that you can see in the future.
Personal loans are usually installment loans; this means that they have a series of payments that must be made for a fixed period of time. So you’ll take out a personal loan to cover your credit card debt (and you’ll stop using your credit card, of course), then start making the installment payments and the whole time know that there is an end to your debt.
3. Improve your Credit History
A small personal loan can be used strategically to improve your credit history and build a better credit score so that in the future you’ll be able to apply for more credit or loans when you need them.
The first way this will work is by improving the variety of credit that appears on your credit report. This is important because most credit score evaluations take into account the different types of credit that you have. If up until now the only type of credit that you have comes from credit cards, your credit score will reflect that. There needs to be a mix of both revolving accounts (credit cards) and installment accounts (personal loans, mortgages etc.) as this will improve your credit score greatly as well as show future lenders that you are able to handle having debt and credit in a responsible manner. Taking out a personal loan will add an installment account to your credit report and help add variety to your credit score.
The second way a personal loan can help improve your credit history is by reducing a high “debt usage” ratio. The reason this is an issue is because the calculation of your credit score takes into account the ratio of available credit your have to the balances you have on those accounts. If you have a credit card that constantly carries a balance that is more than 25% of the available credit then your credit score is definitely being hurt. You can use a personal loan to pay off at least part of your credit card debt and this should hopefully improve your credit score because your “debt usage” ratio isn’t so high anymore. Learn more about credit scores here.
Don’t let debt scare you. Taking out a personal loan, if used strategically, can help you save money and improve your overall financial situation. Review your debts, credit card balances and interest rates and you should be able to tell right away if a personal loan can help you on your way to a brighter financial future.