You’re probably aware of personal loans, which you can get from a bank or other financial institution. They traditionally come unsecured, meaning you don’t need to back the loan with collateral to get the funds. What makes them different from other loans, such as a mortgage or a car loan, is that you can use the proceeds from the loan for a variety of purposes.
Personal loans are still a relatively uncommon type of financing. Only 1 percent of American families applied for personal or family loans in 2017, and personal loans comprise 1.5 percent of outstanding consumer debt, according to data from LendingTree, which owns Student Loan Hero. Many people are more familiar with applying for a car loan or getting a new credit card.
Personal loans are gaining in popularity, however, for many reasons. They may even be right for you. Here’s a look at the various benefits of a personal loan.
“If you truly need cash, you could use some digital providers to compare rates and get as much as $50,000 today.”
Build or support your credit score
Ten percent of your credit score is based on your “credit mix,” or the different types of credit you have, such as credit cards, instalment loans, and finance company accounts. You can only raise your score so far, for example, by using just credit cards — no matter how faithfully you pay them and keep your balances low. By adding another type of credit, you may improve your credit mix and potentially raise your score.
Be aware that taking out a personal loan may cause your credit score to drop a few points in the beginning. Any time you apply for a loan or credit, the “recent inquiry” on your credit history may cause a small, temporary ding to your score. However, unless you are on the edge of a credit score category and you need to have your score at its best right this minute, this is generally nothing to worry about.
Refinance your high interest debt with a lower interest personal loan
If you have high interest debt (a car loan you got before you improved your credit score, or a high interest credit card balance, for example), consider paying off that high interest debt as quickly as you possibly can. If you can’t pay with cash, you may be able to take out a personal loan at a lower rate to pay off your high interest debt.
With less money going to interest expense every month, you’ll make much faster progress paying off your balance.
Consolidate multiple debts
What if you’re spread thin with too many debts — several credit cards and a couple of medical bills, for example? Trying to pay the minimum amounts on more than a few debts can be frustrating, and it’s easy to miss one and rack up even more in interest expense and penalties.
Managing debt is the most common reason people take out personal loans. By taking out one personal loan to pay off several debts, you’ve consolidated your bill paying nightmare into one payment per month. You know how much it’ll be, and you don’t have to decide which bill to pay. Your minimum payment on one consolidated debt is likely to be less than your total minimum payments on a raft of smaller debts, too.