Personal loans are great as you are able to use the money that you receive anyway that you like, but here is a look at 3 smart ways to use a personal loan to help you save money, pay off debt and build a better financial future.
Better Interest Rates Means You Can Save Money
If you have a high interest loan or credit card and are having problems making the repayments or believe that you will never get on top of the debt and be debt free then a personal loan could help you. If you are able to obtain a personal loan that has a significantly lower interest rate then your current debt then you are able to save money.
If you can get a personal loan with a lower interest rate then you are able to use the personal loan to pay off your high interest debt or credit card. You will be saving on interest so that extra money can go towards paying your personal loan.
Reduce Credit Card Debt
Let’s say that you have charged an expensive purchase to your credit card and believe that you will be able to pay it off by with your next paycheck, but it didn’t happen and you are making monthly payments each and every month. This happens a lot because credit cards make it easy for us to spend money and forget about it, but you just end up in the cycle of making minimum monthly payments. These repayments can drag on for years without an end in sight. Personal loans, on the other hand, have a set end date.
Personal loans are instalment loans, which means there are a number of fixed repayments that are made for a fixed period of time. It might be an idea to then use a personal loan to pay off your credit card debt and pay the personal loan per month knowing that there is an end to the debt.
Improve Your Credit
You can use a small personal loan strategically to improve your credit and build a better credit score.
Firstly, a personal loan shows variety on your credit report, which is important as credit score evaluations take into account the different types of credit you have. You need to have a mix of revolving credit like a credit card and instalment accounts like a mortgage or personal loan. Having this variety shows lenders that you are able to handle credit and debt responsibly.
A personal loan is also able to help to improve your credit history by reducing a high debt usage ratio. Part of your credit score is determined by the ratio of available credit to the balances you have on those accounts. If you have a credit card, for instance, that always carries a balance that is more than 25% of the available credit then you are hurting your credit score. A personal loan can be used to pay off part of your credit card debt, which will then reduce your debt usage and improve your credit score.
A personal loan can be used in a number of ways that can actually help you financially. You need to review your credit card balances, debts and interest rates to see if a personal loan can help.