Not every loan is a bad one. Sometimes it is smart to actually take on debt and it can even be a benefit to your overall financial picture. Let’s take a look at a few of the cases when a personal loan might be a good idea.
Debt Consolidation
This is perhaps the best use for an unsecured personal loan. Paying off high interest credit card debt can put money back in your pocket each and every month and boost your credit score.
How Does It Help
The average interest rate in this country is almost 18 percent. If you are carrying 10,000 dollars in debt, this is 1800 dollars a year in interest. With good credit, you can qualify for a personal loan that is a third of the interest you are paying. In the above example, that would save you around 1200 dollars a year in interest.
Another benefit is that it puts all those little accounts into on larger and much more manageable account. This could potentially save you money from late fees.
Quick Tip
If your credit is not good, you still may be able to consolidate, but at a higher interest rate. Once you have paid off your cards, give it a few months and then check your credit score. The huge increase in available credit and the increased credit diversity should produce a very noticeable spike in your credit score. You should then be able to refinance your personal loan at a lower rate.
Paying Off A Higher Interest Loan
If you already have an installment loan, you may be able to save money by refinancing it.
How Does It Help
Obviously, it is better to pay less interest than more interest. If your credit situation has changed since you originally received your loan, it might be time to refinance. Some factors that could qualify you for a lower rate include an increase in income, a higher credit score or simply having less overall debt.
Quick Tip
Overall, you want to keep credit inquiries down, but it does pay to shop your new loan around. Credit bureaus know that consumers do this so many inquiries all at once may be only count against you as one.
Home Improvement
Does your home need a makeover, a personal loan might be the answer.
How Does It Help
The obvious answer here is that it gets you the home improvements that you likely desperately want. There is another benefit though, increased home equity. Many home improvement projects can return as much as 80 percent of the cost. Spend 10000 dollars on a bath remodel and your home increases in value by 8000 dollars.
Quick Tip
If you are looking to gain value in your home, it is the big ticket items that do the most good. Think baths, kitchens and outdoor living spaces.
Getting The Best Personal Loan
So, obviously these personal loans have some benefits and not all debt is bad debt. Now, how do you go about getting the best deal on a personal loan? Here are some tips.
Know Your Credit Score
These days, everyone should know their credit score. Nearly every credit card company offers free monitoring and websites like Credit Karma are free and easy to join.
Before applying for a personal loan, make sure that you know your credit score and what is on your report. This will not only give you an idea about what your loan rate should be, but it could also clue you in on quick changes you could make.
For example, if your credit utilization is sitting just above 30 percent and one extra payment can get it to drop below 30. That could be enough of a credit score increase to score you a better rate.
Understand Credit Ratings
If you understand how your credit score is computed, you can be much better at tweaking it to get a better loan rate.
The biggest part of your score is your on time bill payments. This is an easy one to stay on top of, just pay your bills on time. Set up reminders and use automated payments to make it easier.
The next biggest scoring factor is credit utilization. This is how much of your available credit you are using. You have probably heard to keep this under 30 percent and this is true but under 10 percent is even better. To improve this ration either pay down that credit card debt or ask for credit limit increases.
The above two factors make up over 60 percent of your credit score. The rest of your score is from factors like average age of credit, credit diversity, new credit and inquiries.
Shop Your Loan
Rates can vary greatly from lender to lender and shopping the loan around could save you hundreds of dollars in interest over the course of your loan. On a 10,000 dollar loan, the difference between a 6 percent rate and a 7 percent rate is over 300 dollars over the course of 5 years.
As you can see, even just a little difference in interest can add up big, so shop it around. Just be sure to do all of your inquiries in a short period of time so that they only count as one hit on your report.
