Things to Know About Personal Loans
When it comes to managing debt, too many people key in on credit cards and student loans. The surprising truth is that plenty of borrowers find it difficult to pay back personal loans in full and on time. Let's delve into the topic of personal loans to help you determine if this type of loan is ideal for your particular financial situation.
Personal Loans Individuals who are in search of a way to acquire a rapid influx of cash for something like a small business, auto repair or other important expense should consider the prospect of a personal loan. A personal loan provides all sorts of benefits aside from the quick cash. For one, it can boost one's credit score if paid back promptly and in full. It might even help keep a small business afloat. Some people even apply for a personal loan and pay it back as a means of improving credit worthiness for future endeavors.
A Source of Financing for Credit-Challenged Individuals The prolonged recession has made it awfully difficult to obtain credit. Most lenders have lofty standards that the average person can't meet. Lenders will sometimes require collateral in addition to examining an applicant's credit score. Those who have a poor credit rating will undoubtedly find it difficult to obtain a secure line of credit. Even those who somehow find a way to obtain a decent line of credit will likely be hampered by the exorbitant interest rate. This is precisely why so many people are turning to personal loans. Personal loans are often made available to individuals even if they don't have perfect credit.
Personal Loans Can Help Establish a “Credit Mix” Too many people make the mistake of obtaining an array of credit cards, running up charges and attempting to pay them off in order to build their credit rating. The unfortunate truth is that such an attempt to establish a decent credit rating is awfully risky. If the borrower loses his job or an unexpected expense pops up, he might not be able to make the minimum monthly payment by the deadline. Furthermore, lenders are looking for potential borrowers who have a diverse debt history, also known as a “credit mix”. According to one of the premier credit providers, FICO, the types of credit that an individual obtains and pays typically determines about 10% of his credit rating. A loan applicant who has a history of taking out lines of credit like credit cards, student loans and personal loans will be much more coveted than an applicant who has paid off a couple of credit cards over the past half-decade. When installment loans like personal loans are combined with revolving lines of credit such as credit cards, the borrower can greatly boost his credit score and consequently, his eligibility for additional loans across posterity.
The Risk of a Personal Loan Just like any other type of loan or line of credit, personal loans carry an inherent risk. If the borrower can't meet the minimum payment by the deadline, his credit rating will take a hit. In a nutshell, personal loans have the potential to backfire if the borrower is downsized at work or endures surprise expenses that preclude him from paying off the personal loan according to the lender's terms. Unlike other lines of credit, personal loans almost always mandate that the borrower pay off the loan with fixed monthly payments. Though fixed payments clear up any doubt as to how much money will be owed per month, there is a downside. In many instances, a larger portion of the personal loan's total balance must be paid compared to credit card balances. If a borrower has grown accustomed to paying a fraction of his credit card bill in the form of the minimum monthly payment, he might find it challenging to pay the fixed monthly amount due on a personal loan.
Strategic Planning Will Help Prevent Personal Loan Mistakes When applying for a personal loan, consider how much you will be able to pay back on a monthly basis. Consider the prospect of an unexpected expense arising or a decrease in your work hours. The beauty of a personal loan is that it provides money without delay or uncertainty regarding repayment terms. You will know exactly how much money is due and when it is due. This knowledge empowers you to build a budget with your personal loan payments in mind. As a result, you can avoid the prospect of late or insufficient payments that damage your credit rating. You can even use the quick cash provided by a personal loan to pay down your high-interest credit card balances or other debt obligations. In this context, a personal loan is a true “life saver” for personal finances.*
*This article provides broad and general guidelines and does not constitute professional financial advice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions.