Being in debt can be a scary thing and most of the time you are encouraged not to be, but there are some debts that are considered to be “good debts”. Debt is strategic when it is thought and valued as being good for our long-term financial situation. There are all sorts of ways to get into debt, but it’s important to choose the best type for our situation. Most people choose a credit card as it is probably the easiest to get, but it is also the easiest to abuse and it could create more problems than it solves. A low-paying personal loan from a private lender is just as easy to obtain as a credit card, but it may have the benefit of perhaps helping your financial situation instead of risking to make it worse. .
Here are three smart ways to use a personal loan to save money, pay off debt and build a better financial future.
Save money with a better interest rate
If you currently have a high interest rate loan or a credit card and are struggling to complete payments or if you think you will never be able to take over and repay your debts, then you should consider to get a personal loan to help you. If you can qualify for a personal loan that has a much lower interest rate than your current credit card or loan, this one will save you more money than you think.
Apply for a personal loan and see what kind of rate you can get. If it’s lower than your current rate, you can pay off your current credit card or loan at the higher rate and save hundreds of dollars.
Reduce the balance of your credit card
Here is the situation: you load an expensive item on your credit card, saying that you will pay it back as soon as you get your next paycheck, but of course, that never happens and you are taken to repay the balance minimum for months. Debt can drag on for years and it’s getting harder and harder to get out and see an end to this debt. On the other hand, a personal loan has an end, a last payment that you can see in the future.
Personal loans usually have a fixed term; this means that they have a series of payments that must be made for a specified period of time. So, taking a personal loan to cover this credit card debt guarantees it an end (as long as you stop using your credit card, of course).
Improve your credit history
A small personal loan can be used strategically to improve your credit history and improve your credit rating so that in the future you will be able to apply for more credit or loans when you need it.
The first way that this works is by improving the variety of types of credits that appears on your credit report. This is important because most assessments of your credit rating take into account the different types of credit you have. If so far the only type of credit you have comes from credit cards, your credit score will show. It takes a mix of revolving accounts (credit cards) and installment accounts (personal loans, mortgages, etc.) as this will allow future lenders to see that you are able to manage your debts in a responsible manner. Getting a personal loan will add more variety to your credit report and improve your rating.
The second way that a personal loan can help improve your credit history is to reduce a high rate of “use of debt”. This can be problematic because the calculation of your credit rating takes into account the ratio between the credit you have available and the balance these accounts. If you have a credit card that constantly has a balance of more than 25% of your available credit, your credit rating suffers. You can use a personal loan to pay at least a portion of your credit card debt, which should improve your credit score because your “debt utilization” ratio will not be so high.
Do not let the debts scare you. A personal loan, if used strategically, can help you save money and improve your overall financial situation. Evaluate your debts, your credit card balances and interest rates and you should be able to see immediately if a personal loan can help you on your way to a better financial future