While some people avoid going into any form of debt, those who are financially savvy know that sometimes getting a loan can have a positive impact on your current financial situation. Of course, if you use it wisely and cautiously. Let's talk about ways to use personal loans in a way to save money or improve your financial health.
A personal loan refers to a type of borrowing people use to cover their long-term financial needs of various kinds and forms. Personal loans are typically unsecured, meaning that you don't need to provide collateral to access the funds. Also, they come with flexible repayment terms and amounts that can suit various life projects, including major purchases and investments. Personal loan interest rates are usually fixed, so you will repay the funds in predictable monthly payments. In most cases, you can get between $1,000 and $100,000 with a personal loan depending on your income and credit score.
A personal loan itself is neither good nor bad debt. This means that it can be both depending on the way you use it. Thus, only your financial behavior determines whether your personal loan will bring value to your life or destroy your budget.
A personal loan can be considered good debt if you use it in a way to get some benefits in the long run. This may include investment, auto financing, home improvements, refinancing high-interest debts, and more. If you use the borrowed amount for luxurious items, expensive wants, or other unnecessities, it will bring you nothing but a debt that increases your financial burden.
Personal loan lenders don't limit you in the way you can use the funds. But there are some situations that are considered a bad idea for getting a loan. For example, if you're not sure that you will be able to repay the money or time or are going to buy things that you can easily do without, try not to go into debt. Taking out a personal loan may be a good idea if it helps you to pay off expensive debt or cover emergency expenses that can result in higher financial losses if you don't act quickly.
If you want a personal loan to bring some value to your life, you need to use it wisely. Below are 5 best ways to make the most of your borrowed money.
If you have several debts that are getting harder and harder to manage, you can combine them into one debt with a single monthly payment. This way, you take out a personal loan, often at a lower rate than your existing debts, and use the funds to pay off your multiple loans early. This will help you make your loan payments more organized and manageable. Just make sure this action won't involve any prepayment fee.
Having a good credit score can make your life much easier. By building strong credit, you will be able to qualify for lower-interest loans. This can help you significantly when it comes to getting a mortgage, a car loan, or a higher credit card limit. Thus, it can potentially save you money by helping you access lower interest rates.
Your on-time personal loan payments are always reported to major credit bureaus. Each time you pay on schedule, your credit score improves. Additionally, getting a personal loan contributes to your credit mix and shows that you can handle different types of debt. Both these factors positively affect your credit score.
However, if you delay your payments, the situation will be the opposite. Your lender will notify credit bureaus about your late payments, making your credit score go down. Therefore, you should always be realistic about your current financial situation and know for sure that you can afford the debt you're going to enter.
Personal loans can be used for a variety of expenses, including those that can be difficult to cover on your own. They include a vacation, wedding, expensive medical treatment, car, and more. By using a personal loan instead of a credit card, you can get lower interest rates and save money in the long run.
Let's do some math: while the average personal loan interest rate is 10.97%, credit cards come with an average of 20.36%. As you can see, a personal loan can help you spend less out of pocket each month if you use it to cover your credit card debts. However, you need to have good credit (typically over 700) to access better interest rates and benefit from this option.
Personal loans usually come with fewer fees compared to other options. This can result in bigger savings over some time. However not all lenders can offer you loans without additional fees, so you need to shop around before choosing a loan provider to deal with. Also, your credit history may be a determining factor.
Suppose that you want to get a personal loan to save money. There always comes a question: "How to choose the right option?" Below are some features that deserve your attention at the selection stage:
Know your credit score. This will help you understand whether you need a lender's requirements and what loan offers you can expect to get. Each of the three major credit bureaus (Equifax, TransUnion, and Experian) allow you to access a free copy of your credit report once a year. Thus, you will stay informed and realistic about how lenders see your credit profile.
Compare interest rates. Each lender sets its loan terms, so personal loans are not created equally. Choose the lenders that allow you to pre-qualify for a loan without affecting your credit score. Then, you can compare a few offers and choose the one with more favorable rates.
Choose suitable repayment terms. The repayment period affects the amount you will pay each month. This happens because your total loan cost will be divided equally among the number of months of your loan term. Thus, the longer the period, the lower your monthly payment amount will be. At the same time, you will pay more interest, so your total loan cost will be higher in the end. Try to choose an adequate and reasonable repayment period that comes with both affordable monthly payments and acceptable total interest.
Additional fees. Your interest rate and repayment period are not the only components that can potentially affect your loan cost. Lenders can also charge some fees that will make your loan more expensive in some cases. For example, a lender may set prepayment fees that will oblige you to pay more if you're going to repay the funds early. Also, you may be charged late fees for not paying timely or origination fees for processing your loan.
It's possible to benefit from a personal loan, but you need to assess your financial situation first. In some cases, using a loan will save you money and help you reach a better financial future. Keep in mind that only your financial behavior determines whether a personal loan will be your ally or an enemy for your budget.