Many people are now considering personal loans because of the low interest rates. Is this the right choice? Because I don’t know the details of your situation, I cannot answer this question.
Instead, I will discuss the pros and cons of personal loans before you decide whether to get one.
This discussion does not use the term “personal loans” to refer payday loans or cash advance loans. These are scams and not loans. Instead, I use the term “personal loan”
A loan from a trusted lender is one that is directly deposited into your bank account. You then make monthly principal payments and a small amount interest.
Fiona is a trusted, free lender that compares personal loan terms and interest rates. It connects you to the one that is best suited for your needs.
Personal loans have many advantages
Pro #1: Increase Credit Score
You can improve your credit score by getting a personal loan.
- Better payment history: Making timely payments on your personal loans will improve your payment history which is responsible for 35% credit score.
- Less credit use:Personal loan can help you improve your credit score. You can use your earnings to pay down higher-interest credit card debt. If you have a single credit line with a credit limit up to $5,000 and a balance over $4,000, but are approved for $3,000 personal loans, that $3,000 can be used to pay off a portion of your credit card debt. This will reduce your credit card usage from 20% to 20%. Credit card usage accounts for 30% of your credit score. Using low-interest loans to repay credit cards can greatly improve your credit score.
- Enhanced credit mix: Finally, if your credit score is lower than 10%, a personal loans can help you to improve your credit score. Personal loans increase credit mix by 10%.
Pro #2: Consolidate your debt
You can actually save money by getting a personal loan to pay higher-interest debt. If you take out a personal loan at 10% interest to pay off your credit card at 20% interest you will end up paying half the interest.
Pro #3: Don’t use high-interest credit cards
A personal loan may be able to keep you from taking on higher-interest debt in certain cases. How can you tell if you have taken you away I highly recommend having an emergency fund to cover any unexpected expenses.
If you don’t have an immediate fund or need to make a payment quickly, a personal loan with low interest can be cheaper than a high-interest card.
Pro #4: You have the option to invest the profits in order to make more money
A personal loan is a way to make money if you borrow money at low interest rates and then use it for investment in something higher.
This is what I liken to a mortgage on rental property. You borrowed money, you pay interest, but your rental income covers the interest payments.
This is an advantage of personal loans that I have used in the past. However, this strategy comes with significant risk. You borrow money to invest, so there is more risk.
Personal loans: The cons
Scam #1: It can hurt your credit score
Although a personal loan can improve your credit score, it can also harm your credit score in many ways.
- Credit Extraction – Your lender will likely pull your credit report when you apply. This can temporarily reduce your credit score.
- A personal loan can decrease the length of your credit history by about 15%. The length of credit history is calculated using the average of the time items have been on your credit report. Adding a personal loan to your credit history can drastically reduce your credit score. .
- Poor payment history: Finally, as I said earlier, 35% of your credit score is determined by your payment history. If you miss payments on your personal loans, you could see a drop in credit scores.
Con #2: You can be tempted to spend.
Personal loans can make it easy to spend recklessly. When they don’t have much money, people are less likely to be reckless about their spending. I therefore keep very little money in my bank account.
You might be tempted to spend more if you suddenly have a lot of money in your bank account.
Scam #3: Paying interest
Personal loans have interest rates that are out of your budget.
Con #4: Fees
Personal loans can have additional fees such as origination fees, late fees, non-refundable application fees and prepayment penalties. Before applying for a personal loan product you should ask the lender about any fees.
Do you need a personal loan?
I don’t know if a personal loans is right for me. It is up to you to weigh the pros and drawbacks of a loan and decide if it is worth the cost.
A personal loan is a good option if you plan to use the loan to pay higher-interest credit cards debt. However, you must make timely payments and not ruin your credit rating.
A personal loan, however, is not an option if you’re looking to pay for a vacation or other similar expenses.
In terms of consumption, I am a big advocate for delayed gratification. Using unborrowed money is not only smarter financially, but it will also make it more rewarding to buy things you work hard for and pay with your own money.
You should fully understand the terms and conditions of any personal loan you are considering. Many personal lenders offer low interest rates, but charge high fees.
