Student loans are meant for undergraduates whereas home loans are given to first-time or second- time home buyers. But what about personal loans?
Personal loans are unsecured loans that you can get from banks, lenders, personal finance companies, and financial institutions. You can use personal loans in various ways to uplift your financial situation. The most popular way to do it is to consolidate your high-interest loans with a personal loan. The interest rate on a personal loan is lower than credit cards. So, you can pay off your high-interest debts fast.
The personal loan approval process is quite fast. So, you can even get the money within 24 hours depending on the bank.
Today, we will discuss how to use a personal loan judiciously. Like I said before, you can use personal loans to pay off debt. First, let us discuss the reasons behind it. Thereafter, we will discuss the 7 other ways to use a personal loan for covering various expenditures.
Many consumers prefer to pay off credit card debt with personal loans to ease their financial burden. Here are the top 5 reasons why it is good to use a personal loan to pay off credit card debt.
The average interest rate on a 2-year personal loan is 9.50%. The average interest rate on credit cards is 14.52%. Now, you calculate the difference between the two types of credit. A personal loan can help you to save around 5% interest in total.
Suppose you have 3 credit cards. Your total outstanding balance is $12,000. The average credit card interest rate is 17%. If you want to pay a mere 2.5% of the outstanding balance every month, then your minimum monthly payment will be $300. If you make only the minimum monthly payments, then it will take around 28 years to clear your debt. You have to pay $15,000 on interest itself.
Now, if you take out a personal loan at 9.50% with a 2-year repayment term, then you have to pay $551 every month and only $1224 on interest. So, you will save $13774 on interest.
A personal loan helps to consolidate multiple bills into a single monthly payment plan at a moderate interest rate. This helps to simplify your financial life. When you have fewer bills, it becomes easy to tackle your budget and debts. You can make steady progress on your debt payments also.
Personal loans come with a fixed repayment schedule and the final payment date. Your last payment date is the day when you will get out of debt. It is your financial independence day.
When you have credit cards, you have the chance to add new debt every month. A credit card is a revolving account where you can make fresh new purchases and keep on adding debt. Therefore, it gets difficult to predict the final debt payoff date accurately.
A personal loan is a closed-end loan. It has the final payoff date. So, it is easy for you to stay motivated and move toward your goal of attaining financial freedom.
Sometimes, credit card interest rates are variable. When you have a fixed interest rate on a personal loan, you can have an idea of how to control debts. You can also know the date of your release from financial obligations.
Not many people know that the FICO score model doesn’t include personal loans in the calculation of the credit utilization ratio. When you pay off your debts with a personal loan, the ratio of your total revolving credit and your total available credit drops. This helps to lower your credit utilization ratio and increase your credit score. Moreover, personal loans help to improve your credit mix. This helps to impress the lenders as they feel that you can handle various types of debt responsibly.
A single personal loan is enough to reduce your overall debt burden. Apart from credit cards, you can use the money to pay down your student loans or auto loans or any other loan you have. So, it isn’t that you have to use the money to pay down credit card debt only.
Just make sure you stick to the repayment plan of your personal loan. Otherwise, you can hurt your credit score. Also, you should avoid incurring fresh debts.
There are times when you shouldn’t use personal loans to repay debts. So, let’s discuss and understand when personal loans are not a good option for paying off debts.
There are 2 types of repayment plans for personal loans. The first one is the short-term personal loan, and the second one is the long-term personal loan. The short-term loan often has a low-interest rate. However, since the repayment period is short, your monthly payments tend to be high. You have to pay off the loan quickly. So, you have to make high installments. This may put pressure on your budget.
Again the monthly payments on a long-term loan are usually low. But the repayment term is again long. This means that you have to pay more in the long run.
A personal loan gives you a lump sum amount in your hand. If you can’t be financially disciplined, then you could get into a worse situation. Let’s understand how.
Suppose you have taken out a consumer loan of $10,000. After you have received the money, you decide to use it to pay down your debts. So, you take steps as per your plan and clear your credit card debt.
You feel relieved and happy after paying down your credit card debt. You feel so relieved and happy that you start using credit cards for shopping again. So, you end up incurring fresh debts. So now, you not only have to pay off your personal loan but also the fresh credit card debt.
You are in a worse financial situation now. You have to manage both the debts now. You have to arrange money to make payments on both the debts. The utility of the personal loan is lost.
Personal loans have both pros and cons. Unless you lead a financially disciplined life, it will be tough to end your debt problems. Personal loans won’t solve your problems if you can’t change your reckless spending habits. Moreover, you need to have a good credit score to qualify for a personal loan at a good interest rate. If you don’t have a good credit score, then you can enroll in a debt consolidation program or a debt settlement plan to pay off your debts. In both these cases, you don’t need a good credit score to qualify for these programs. A dedicated Financial Coach will guide you through the entire process so that you don’t make any costly mistakes. Plus, you can save a lot of money with both settlement and consolidation. Call our toll free number 800-530-OVLG to know which option is best for you.
As the name implies, a personal loan can be used for any purpose. Here are the 8 unusual ways to use a personal loan.
Credit card debts can push you towards bankruptcy and tank your score. Plus, the incessant collection calls ruin your peace of mind. In this scenario, you can use a personal loan to pay off your high-interest credit card balances and pull up your credit score with time.