5 Ways a Personal Loan Can Help You Save Money

While it is good financial practice to set aside an emergency fund for unforeseen expenses, it is not always enough to cover all the expenses you may have. Sometimes, you may encounter large expenses that you cannot afford to pay from your bank account. Some examples might include medical expenses, moving expenses, consumer products, and home repairs.

To fill the gap, a personal loan can be a good option, especially if you can qualify for a low interest loan. A personal loan can often be a better option than using high interest credit cards for these type of unexpected expenses. Here are five ways a personal loan could help you save money in the long run.

1. To help consolidate credit card debt

Personal loans generally have lower average interest rates than credit cards. For example, as of September 8, 2021, the average credit card interest rate was 16.21%, while the average personal loan interest rate was 10.46%. Due to the difference in rates, personal loans are commonly used to pay off credit card debts. Some lenders even have personal loans designed for this specific purpose.

If you’re struggling to pay off your credit card debt or your minimum monthly payments are too high due to interest charges, a personal loan with a lower interest rate may be the best option to help you save money. money and pay off your debts.

The downside to using a personal loan to consolidate debt is that the interest rate on your personal loan may be higher than the interest rate on your credit card if you have a lower credit score. falls in the bad to medium range – 669 or less, based on the comp FICO score. Some lenders have interest rates as high as 36 percent.

To improve your chances of qualifying for a lower rate, focus on improving your credit score. Two ways to do this are to pay off your debt and make sure you pay your bills on time. If you don’t have time to wait for your score to improve, try applying for a loan with a co-signer or co-borrower who has better credit.

2. To help you finance a large one-time expense

When great times are happening in life and you need cash for a big one-time expense, a personal loan can be the most convenient and cheapest way to borrow money for that item or experience. .

Since lenders usually allow you to use a personal loan for almost anything, it can be used to pay for a vacation, wedding, boat, or one-time medical intervention. If you decide to take out a personal loan out of want, not need, calculate your payments to see if you can afford to repay the loan. Using a loan calculator can help.

One of the downsides of using a personal loan for a one-time expense is that the ease of getting a personal loan can make you more likely to use it for non-critical expenses. It is better to save for these types of expenses if possible rather than going into debt for something like a vacation. Plus, missing a payment or defaulting on the loan can severely damage your credit score, making it more difficult for you to take out loans in the future.

3. To help you ditch the high interest rates

Personal loans are more flexible than other loan options, which means you can agree to a repayment term of anywhere from six months to 10 years. A good strategy for ditching high interest rates sooner might be to take out a debt consolidation loan to consolidate multiple debts.

If your monthly personal loan bill is lower than it was with multiple bills, consider paying more than the minimum owed. Paying off your loan early could save you hundreds of dollars in interest. Before you do this, however, make sure your lender isn’t charging you a prepayment fee.

Another alternative to using a personal loan to ditch the high interest rates is to just focus on paying off your debt using the snowball or debt avalanche method. Depending on your debt load and your financial situation, this may work better than taking out another loan to pay off your debt.

4. To help increase your credit score

If you have credit card debt and spend near your spending limit each month on your cards, your credit utilization rate will increase and lenders will view you as a higher risk.

Personal loans can help with the use of credit, especially if they replace your credit card debt. Credit cards are revolving loans, while personal loans have a fixed repayment term, which means that there is a timeline for repayment of the loan. This will help you lower your credit utilization rate and diversify your debt types, which will help rather than hurt your credit score.

5. To help you avoid pesky pop-up fees

One of the main advantages of choosing a personal loan when you need financing for a big expense is that you can check out the lender’s fees, if any, before you accept the loan. Ongoing charges include late payment charges, prepayment charges, returned checks charges and set-up charges. The lender will share this information with you when they send you the Loan Truth Disclosure – a document that describes the loan’s APR, fees (if applicable), and finance charges.

Knowing the fee structure before signing your loan agreement will help you avoid contextual fees.

The bottom line

Using a personal loan to refinance credit card debt can save you a ton of money if you get a lower rate. Plus, using one can help you save on the wedding or vacation of your dreams if you choose a loan amount that you can comfortably repay.

However, if possible, you should avoid taking out a loan that you cannot afford. It can put you in a bad financial position and ruin your credit if you miss a payment or don’t pay off the loan.

Comments are closed.