Can A Personal Loan Save You Money?
It might seem impossible, yet it is the case. A personal loan can help you save money. But how does that work? In this article, we’re going to explain to you how taking out a personal loan can help you save money and improve your credit score.
What is a Personal Loan?
Let’s start by explaining what exactly a personal loan is. It’s a type of loan that varies from a few thousand dollars up to $150,000, most of the time with a fixed interest rate, but it can also be with a variable interest rate. A personal loan is most commonly used to finance expensive things like a home renovation, a new car, or buying an entire new house. A personal loan can also be used to consolidate debt. Whenever you read or hear about an unsecured loan, it means you don’t have to put up any collateral.
How much interest you need to pay on your loan (APR) is firmly dependant on your credit score. As interest rates on personal loans are way lower than on credit cards, you’ll save a lot of money consolidating any credit card debt with a personal loan.
To be a bit blunt, the terms and rates on your loan al depend on how well you handle credit or money in general. What does your credit history look like, how high is your credit score right now, what’s the height of both your income and debt-to-income ratio?
The better you have shown financial institutions, your credit bureau, and your bank that you can handle money and debt well, the more comfortable they will approve you for a personal loan, and the more flexible their terms will be.
When should you consider a personal loan?
Unless truly needed, you should think twice before applying for one. Do not take out a loan for small, unnecessary things. Only consider applying for a personal loan in the case of a significant home renovation, the purchase of a new car, or even an entirely new property. Also, be sure you can repay the loan within the next three to five years. Personal loans are very flexible nowadays, which means you can spend the borrowed money on almost anything, but this doesn’t mean you should apply for one for everything you want in life.
One of the smartest things people apply for a personal loan is to consolidate (credit card) debts. Most credit cards have insanely high APRs after the first year, so many people take out a personal loan to pay off this debt at a lower interest rate. Before you think of doing this as well, consider your credit score and make sure you don’t decrease it by doing so. In general, it’s best to repay credit card debt and become debt-free and not use the personal loan as a tool to postpone debt repayments.
Saving money by refinancing your current loan(s)
What if your current existing mortgage is an expensive loan? That chance is excellent if you have not recently taken out a loan; the interest rate is now historically low. By converting your mortgage to a new loan with the current flat interest rate, you save a lot of money. Comparing different loan providers allows you to see for yourself how much you will save after converting your loan.
A new loan means not only a lower interest rate but also new conditions that are often more favorable than the old one. If you decide to convert your overpriced loan and transfer to a new loan, that means lower monthly payments or installments. You can also redefine the term of the loan: a longer-term, for example, means lower monthly payments. With old loans, additional repayments were not permitted without penalty. With the current loans, you may make other interim payments free of charge.
Converting old personal loan(s) to a new one or switch to revolving credit
Converting your old personal loan to a new personal loan means a new, fixed low-interest rate. With the new loan, you agree on another term. Once the loan has been taken out, you will benefit from the lower fixed monthly costs. Nowadays, penalty interest is no longer charged when transferring a personal loan. In the past, the bank passed on the loss of the calculated interest income to the customer.
Converting a personal loan can now be done free of charge. Turning a personal loan to revolving credit is also possible. Your investment will then go from being fixed to being flexible; the interest and duration are variable. With this loan form, you also have control over when and how much money you withdraw from the maximum loan amount. If you have repaid an amount of the loan, but you want to re-take it, you can. You only pay interest on the amount withdrawn, while with a personal loan you pay attention to the entire amount because the bank pays this to you at once
While your shopping for all kinds of things on the internet, why not shop around for a cheaper loan? It makes a lot of sense to do your research and compare different loan providers online so you can save on your loan(s), credit card bill(s), and mortgage. This way, you have a higher income-to-debt ratio and will increase your credit score substantially.