One of the easiest ways to get instant cash is by opting for a personal loan. Unlike other loans, personal loans generally don’t require security or collateral. The documentation and approval processes are also smooth and hassle-free. Moreover, you can use the amount for anything you want – for planning your wedding, for medical purposes, for a vacation, or for renovating your home.
However, defaulting on a loan could adversely affect your credit score. Let’s look at some of the ways how applying for a personal loan can help you improve your credit history.
Personal Loans Can Be Used to Pay High-Interest Rate Loans
When you have a high-interest loan, it could be difficult to repay the amount every month. The most common financing options people opt for are personal loans, payday loan apps and credit cards.
People generally shy away from taking a personal loan as they are known to come with high rates of interest. However, they are still a cheaper alternative to credit cards.
When you have more than one credit card, you will have to pay a high rate of interest on the outstanding amount of all the cards. Even if you opt for a credit card that comes with a 0% balance transfer plan, you will have to finish paying off the amount during the introductory period. Once the introductory period is over, the interest rate will shoot up to a two-digit figure.
When you use the personal loan amount to finance a high-interest loan, you not only reduce the burden on your overall finances but also improve your credit score immensely.
Due to competition from the top banks, you will come across some banks offering personal loans at attractive rates. Generally, the banks with which you have an account already will offer loans at great rates. You can some of the best personal loan lenders below:
Best overall personal loan
Top pick- Borrow $5K–$100K with low fixed rates
- No fees — zero origination, late, or prepayment fees
- Unemployment protection if you lose your job
Best for debt consolidation
Debt consolidation- Borrow $1K–$50K — direct pay to creditors available
- Check rate with no impact to your credit score
- Fixed monthly payments — know exactly what you owe
Best for fair or limited credit
AI-powered approval- Borrow $1K–$50K — AI looks beyond your credit score
- Approved borrowers with scores as low as 300
- Fast funding — most loans funded by next business day
Best for debt consolidation loan alternative
Debt consolidation- Consolidate and reduce debt by 30–50% — no loan needed
- Free consultation — see how much you could save
- A+ BBB rated — one affordable monthly payment
Best for getting out of $10K+ debt
Debt relief- Negotiate your debt down 30–50% — no upfront fees
- Free consultation with no obligation
- Debt-free in 24–48 months — A+ BBB rated
Can Be Used to Consolidate Debt
One of the common financial problems most people face is accumulating different debts and not being able to pay them off. Even if you have more than one credit card, it will be difficult to pay the debts and also your cards’ soaring interest rates.
Moreover, with many debts to pay off, at some point there are chances you could miss repaying maybe one or two of them. Yes, you have the option to make the late payment charges, but your credit score has already been affected with the delayed payment.
Instead of paying debts with different interest rates, you could opt for a personal loan. The financing amount can be used to consolidate your total debt and you could pay off the amount until the end of the tenure. It saves you from the hassle of missing payments as you have consolidated all the payments into one.
Can Help in Establishing a Credit History
Companies that check an individual's credit score assess different parameters before giving a score. The individual’s payment history is one of the most important factors which is considered.
The other factors include the total amount owned by an individual, the duration of the credit history, new credit as well as credit mix. But what If you don’t have a credit history at all?
Not having a credit history is just like having a bad credit score. You need to establish a credit history so that credit unions and banks know your creditworthiness and your ability to repay them.
There are several ways to create your credit history, one of the ways is by applying for a personal loan. However, you must ensure to make your loan repayments on time, as loan defaulters get a bad credit score.
Consider Other Options Before Taking a Loan
A Few Tips to Keep in Mind When You Apply for a Personal Loan
This is a list of key tips to follow when you are applying for a personal loan.
1. Go Through Your Credit Report.
No matter if you have defaulted on a payment or have applied for too many loans, you need to go through your credit report. By analyzing your credit score report, you will be able to know the areas you need to work on and look for ways to improve the score.
While applying for a personal loan can help to a great extent, there are many other factors that could increase your score. Understand the available options and work towards building a good credit history.
2. Make Your Loan Payments on Time.
Did you know that late payments will stay on your credit reports for years? Banks and other lenders go through an individual's credit report when they offer financing. If they come across late payment, they will doubt your creditworthiness.
Even before applying for the loan, learn how to manage your finances properly so that you don’t have to struggle with the additional burden.
3. Don’t Apply for Multiple Loans.
A bank will know how many loans you have applied for and how many times you have applied for a loan. This is because whenever you approach lenders for loans, it will be recorded in your credit history.
This may give the impression that you have poor repayment capacity and your application could be declined. Even if you manage to get more than two or three loans, you need to see if you will be able to manage your monthly expenses properly before opting for a loan again.
4. Borrow What You Actually Need.
One of the mistakes people make is applying for a higher loan amount than they actually need. You end up paying a high-interest rate for the entire amount, including the amount you didn’t require in the first place. Apply for an amount you actually need to meet your short-term financial goals.
5. Compare Loans Offered by Various Banks.
All prominent banks across the world offer personal loans. However, you will come across some banks with better interest rates than others. Before applying for a loan, do your research and compare the loans offered by different banks.
Then, shortlist the ones which come with the least interest rates. Also consider the tenure of the loan, the other fees and charges you need to pay, and the total amount of financing.