Smart Ways to Use a Personal Loan to Save You Money
A personal loan? Save you money?
Yes, you read that right.
But before we look at how exactly you can do this, let’s be clear on what exactly this loan is and why you should consider it.
What is a personal loan?
It is an unsecured loan that is given against a borrower’s credit history. You do not need any collateral when applying. Therefore, you do not risk losing your assets should you default.
Loans often range between $1000- $100,000. How much you can qualify for is dependent on your credit score.
Unlike other types of loans like the mortgage loan or car loan, this is not tied to any specific use. You can, therefore, use it to consolidate other high-interest debts, pay for medical emergencies, make purchases or just about anything you wish for.
Use it wisely, though. At the end of the day, you will pay for it.
The interest rate here is pretty manageable compared to credit cards. The rates range between 8%- 11%, depending on your credit profile as well as the lender.
The only downside is that they can be hard to access because they are unsecured. If your credit score is poor, chances of qualifying are very low.
Now read on to find out how this loan can help you save money.
Paying Off Your Credit Card Debt and Other Debts
So many people are in an endless pit of credit card debt. It is easy to see why, they’re fast and flexible. Before long, the debt accrued piles up and it becomes expensive to pay off because of the high interest.
Take this loan and pay off your card debt. Since the interest is low, you will be left with a smaller loan interest to pay compared to the interest on the card debt.
For a person with a good credit history, an average credit card interest rate is about 20%. On the other hand, an average personal loan interest rate is 8%. That’s a whopping 12% difference. To know how much you will save, do the math with your existing debts.
If you have more than one credit card debt, you can use the loan to consolidate your debts and end up with one low-interest loan.
In the same way, you can use this loan to pay off other existing loans that have higher interest rates.
Personal loans have a longer repayment period but paying the loan in a shorter time means paying a lower interest. Another clever way to save!
Paying Off Expensive Emergencies
It is entirely impossible to plan for every emergency. Many times, you will find yourself with a broken car that needs some huge amount of money to fix, an urgent medical bill, death of a loved one – name it.
The solution for most people is to use their credit card, which is an expensive solution.
To come out of this emergency financially sane, apply for a loan instead of using your card. You will save on the interest.
It is now easy to make loan applications thanks to online banking. In just a matter of days, you have your loan with you.
Paying for Large Purchases
Once in a while you’ll need to make a large payment. This could be for a family vacation, a honeymoon, engagement ring, moving, home improvements or repairs among others. These expenses can dig deep into your pocket and often times such an amount of money is not readily available.
So what do you do?
Instead of using your credit card, get a loan. Besides the fact that you’ll save on the interest, you will also not be tempted to overspend. You will apply for the specific amount to be used.
Also, these loans will discipline you to plan for large purchases rather than impulse buying. Seeing that your card limit is still safe will tempt you to make large purchases.
You Can Use a Personal Loan to Lower Your Credit Utilization and Increase Your Credit Score
Yes, you can use a debt to improve your credit utilization by replacing a credit card with a personal loan.
Credit utilization is determined by your credit limit is-à-is your spending in a month. If you spend too much in a month, then lenders consider you high risk.
Make a habit of taking such just right loans for large purchases instead of using a credit card. In short, reduce the frequency of using the card as much as possible so that you cut down on your credit utilization.
Having more than one credit type also helps in raising your credit score if you are a prompt payer. It can actually contribute to 10% of your credit score. Lenders will easily give the loan because they see that you are responsible with all your debts.
Final Thought: Be Responsible with the Personal Loan
The aim of using the loan is to save a coin or two and eventually end up debt free.
However, this will not be the case if you don’t responsibly use the loan. And there is nothing as painful as paying for a loan that you can’t account its value.
Otherwise, take advantage of the low-interest rates given and the flexible repayment period that comes with personal loans to save.
Use these tips and you’ll be able to save more, even without increasing your income.
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