The personal loan – that ubiquitous term for borrowing money from a lending institution. On the surface, it sounds so simple, so accessible, and so easy to misuse.
The Good: It is quite accessible.
The Bad: It isn’t as simple as it might sound.
The Ugly: It can be misused, and have lasting negative impacts on your credit.
One of the best ways to use a personal loan is to bolster your financial well-being. Whether that is to pay down debts directly or to consolidate, taking out a personal loan can help you take control over your finances and over time better your credit.
If you find yourself deep in debt, the options for digging yourself out can seem overwhelmingly depressing. It is easy to fall prey to “too good to be true” hooks. While there are other reputable lenders beyond banks and credit unions, be aware that there are also a few bad eggs out there ready to swoop down and take advantage of your vulnerability.
If you decide that consolidating your debt through a personal loan is the best option for you, act prudently. Draft a plan and research your options.
NerdWallet’s financial advisor Erin El Issa commented, “If you decide to get a personal loan; gather the information you’ll need to shop around for a loan. Compare rates from local banks, credit unions and online lenders. Don’t simply choose the lowest interest rate – consider fees and payment flexibility as well […] Lending requirements vary tremendously, and some carriers may look at more than just your credit score and income.”
While it’s not widely publicized or advised to take out a personal loan just to improve your credit score, it can have that effect. Particularly when the personal loan is used to reduce debt, you receive the double benefits of 1) opening a new line of credit, which you will handle responsibly; and 2) eliminating other debts, which may not have ideal track records.
Financial advisor and writer for PersonalLoans.org, Jodi Smith, explained, “By having a personal loan through a bank or credit reporting institution, you can actually improve your credit score. If you use the loan to consolidate high interest credit card debt, you are reducing the amount of your lines of credit while making on time payments to just one open account, therefore improving your credit score.”
Final Word Of Warning
The key to using personal loans to reduce debt is that the new line will be used impeccably. Don’t forget that a personal loan is another type of debt and comes with all of the potential downfalls opening any line of credit carries. If mishandled, it can lead to more trouble instead of helping you rebuild.
Maintain the mentality that consolidation through a personal loan is part of a larger picture – it is just one, very important piece of the debt-free puzzle.