How Personal Loans Can Affect Your Credit Score
February 6, 2019
Millions of Americans take personal loans every year as they are a good solution for when cash is needed for a wide range of purposes.
The problem here is that personal loans come in many shapes and forms and most people fail to realize what that means. That usually results in them getting a bad loan that doesn’t help them. Some try to use the loan to consolidate debt and others even manage to use them to improve their credit score.
How Personal Loans Work
First of all, let’s take a look at how these loans function.
There are many different types, and they can range from $1,000 to as much as $100,000. Most are unsecured loans, so there’s no collateral, but the interest rates can come in many sizes. They are naturally higher than with secured loans, but they are also lower than those on credit cards.
It depends a lot on your current financial state, but the more stable it is (clear fiscal responsibility and a good credit profile), the less interest you’ll have to pay and you’ll be able to qualify easily.
All in all, a personal loan is usually a good solution if you know that you can repay it in only a few years.
If you find that your financial state is not good, you’ll have to rethink your monetary policy. You’ll have to start spending more responsibly, stop making impulse purchases, and start creating a monthly budget as that’s the best way to start making sound financial decisions and improve your overall finances.
How You Can Improve Your Credit Score with a Personal Loan
Lenders usually look at your credit card utilization to determine how much of a risk you are and decide on the terms and whether or not they’ll even give you a loan.
Credit utilization is given to them monthly, always before your closing date, which means that if you manage to improve your credit score by that time, they’ll consider you a much lower risk.
You can improve your credit utilization by paying your balance with multiple payments throughout the month, by setting up automatic balance alerts, but also with a personal loan.
That’s possible because personal loans are installment loans and thus have fixed repayment terms. Credit cards, on the other hand, have no fixed repayment terms, so if you decide to change credit card debt for a personal loan, you can lower your credit utilization and improve your overall credit score.
All in all, personal loans are advantageous if you know how to use them and mainly if you use them to improve your credit score. You can use them for the crucial events in your life when you need to pay for something as soon as possible, and they can be a much better solution than a credit card.
Additionally, it also matters which type of personal loan you end up getting. Visit our site to find out more about the right kinds of personal loans or directly apply for one online whenever you want.