How to Use a Personal Loan Smartly!
How many people have you heard complain about paying off loans? Many, right? So much that you are likely to associate debt or loans always with a negative feeling.
You—and many others—are likely to think twice before opting for a loan. This is especially if you are borrowing money to pay off certain personal expenses.
However, taking out a personal loan can be the smartest thing to do in certain situations. Here are three smart ways to save money and secure your financial future by taking a personal loan:
1) Pay off multiple debts
If not used right, debt can be a real pain in the neck. Imagine you have to pay two credit card bills, a house loan, and a car loan every month. The interest keeps piling up with no end in sight. You have to dedicate a major chunk of your salary only to pay these bills. In fact, whenever your colleagues call you for dinner at a fancy restaurant or for a party, you may make up some excuse. Instead of struggling with multiple payments and various rates of interest, wouldn’t it be much simpler to make a single monthly payment? One option is to apply for a personal loan to pay off all your debts.
When you avail the loan, the lender pays off your existing debts. The entire debt amount now comes under a single loan. You simply have to make a single payment at a fixed rate of interest at the end of every month. And unlike credit card payments, personal loans carry a fixed repayment period. It is a beneficial feature because you will know when exactly you will be out of debt. This helps you to plan your financials better.
2) Improve your credit history
When used strategically, a personal loan can improve your credit history. By doing so, you can build a good credit score. It also makes you more eligible for loans for bigger amounts, when you require them in the future. Credit mix is an important factor for most credit score evaluations. It involves a mix of revolving accounts (credit cards) and instalment accounts (personal loans, mortgages).
If your only source of credit is from revolving accounts, your score will clearly reflect that. But to convince lenders that you can handle debt in a responsible manner, you need to display a credit mix. Taking a personal loan will add an instalment account to your credit history. This will add a dash of variety to your credit score.
3) Cover unexpected expenses
Sometimes in life, you may face unexpected expenses without any warning whatsoever. You may be a diligent money manager but the occasional problem can throw your life off tracks. For example, you may have to pay a huge medical bill that is not covered by your insurance. Instead of charging it to your credit card, it is safer to take out a personal loan to cover the expenses.
Personal loans are cheaper and they have a limited time period as the loan term. Another added benefit is that you can avail personal loans without the need of collateral in many situations. Some of the expenses you can cover with a personal loan are funerals, tax bills, remodelling projects, weddings and even divorces!
The bottom line
Debt can be scary. But don’t avoid a personal loan if it can help improve your financial life. Study the benefits and pitfalls before taking out the loan. If you find that a personal loan can help you save money, go for it. But if it proves to be more expensive, you are better off pursuing other options. A personal loan can be a very good option for you; only if it helps you make a path for a better financial future.
