Many consumers use personal loans to consolidate higher-interest debt, such as credit card debt. Compared to other types of loans and credit, a personal loan has several advantages. So, what are the benefits of a personal loan, and is it the best option for you?
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For people with good credit scores, a personal loan usually has a lower interest rate than a credit card. While rates vary based on your credit history and the current market, it’s not uncommon for people to get a much better deal on a personal loan than on a credit card.
You Can Use One to Consolidate Debt
A big advantage of personal loans is that you can use them to consolidate existing debt, depending on how much debt you have. If you have three credit cards that each have a balance of $1,500, taking out a personal loan allows you to pay off all three of your cards. Instead of making three separate payments each month and worrying about three separate interest rates, you can make a single monthly payment, with a single interest rate. Depending on the length of the personal loan, you might be able to pay less each month, as well as save money over the life of the loan by taking advantage of the lower interest rate and fixed term.
You Can Use the Money However You’d Like
When you get a mortgage, you need to use the money from that loan to buy a house. When you get an auto loan, you use the money to buy a car. Your house or your car end up acting as collateral for the loan, and you’re only able to use the money for those two purchases.
A personal loan, on the other hand, is an unsecured loan. You’re not restricted to using the money for a single purpose. If you want to use the loan to fix up your house, you can. You can also use it to pay off other debts, to fund a vacation, or to purchase other consumer goods.
They Can Help Improve Your Credit Score
If you’re looking for a way to boost your credit score, a personal loan might be able to help. Personal loans are installment loans, which means you pay back a set amount over a period, usually anywhere from two years to five years. Credit cards are types of revolving credit, which means once you pay off your balance, you’re free to borrow the money again.
According to MyFico, your credit mix accounts for 10 percent of your overall credit score. If all you have is revolving credit, you might have a lower score than someone with a mix of installment loans and revolving credit. While you don’t necessarily want to take out a loan for the sole purpose of boosting your credit score, if you don’t have much of a credit history, and all you have are credit cards, a personal loan might help raise your score.
One Big Caveat
Before you rush to your credit union to apply for a personal loan, it’s important to look at the big picture. For example, getting a personal loan isn’t a surefire way to get out of debt. When you use a personal loan to pay off other debts, you’re just replacing one debt with another. You’ll also want to create a budget and look at ways to change your spending habits if you want to remain debt-free.
The other things to remember is that the rate you see advertised might not be the rate you’re offered. Several things, including your credit score, affect the actual interest rate you receive on a personal loan. In some cases, the interest rate might be higher than what you’re currently paying. Make sure you check the fine print.
Once you’ve weighed the pros and cons of a personal loan, the next step is to apply and see if you qualify for a loan. Drop by your nearest Coosa Valley Credit Union branch and speak to a loan officer today!