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Personal loans can be used to fill financial gaps in case of emergencies since you don’t need any security to get them. However, a personal loan can also help improve credit scores of people if used wisely. Though, a very few people know about it.   

By taking out small loans, you can afford to pay up on time, you can raise your score. In this article, we’ll take a look at what personal loans are, how they impact your credit score, and how loans can boost your score.

What is a Personal Loan?

In the simplest terms, a personal loan is a type of loan issued by a lender using the borrower’s credit score and a stable income as factors. This means the borrower doesn’t have to secure the loan using any collateral.

The borrower’s score and income also determine the interest rate to be applied for the loan. If the score is low, the interest rate will be higher. If the score is high, the interest rates will be low, although the rates vary from one lender to another.

Personal Loans on Credit Scores

It is important to understand how the credit score is arrived at in order to avoid pitfalls. There are five elements that go into your credit score:

1. Payment history – this analyzes the payment history in terms of early and late payments.

2. Credit utilization ratio – this checks your debt-to-credit limit.

3. Credit history – this considers how long you’ve taken out loans. A long credit account is favorable.

4. New credit – this element analyzes how often you take on new debts.

5. Credit mix – this takes a look at the different kinds of credit you have taken out.

Use Personal Loans to Consolidate Debt

This move will only work with an average credit score. It means you’ll have to realize your debt condition in order to avoid a bad score. One debt that can lower your score is credit card bills since they come with high interest.

The situation can escalate quite fast if you have two or more cards with the same debt. You can salvage the situation by taking out a personal loan. Using a personal loan to consolidate debts is great for a number of reasons:

• They are cheaper compared to credit cards.

• You’ll save on interests charged on various cards by having a single loan to repay.

• One EMI is better than three EMIs.

• As time goes by, your score will rise.

Don’t expect your credit score to rise immediately. However, as you make on-time payments, the score will rise.

Search for the Best Rates

The market offers numerous lenders willing to issue personal loans. However, it doesn’t mean you have to take the first loan that comes through the door. The offer you’ll get from the lender depends on your finances and credit score.

Take some time to go through the fees and the interest rates. Keep in mind, the lower the interest rates and fees, the more you’ll save.

Avoid Multiple Loan Applications

Multiple loan applications with various lenders is not the best move. Every time you make a loan application, the entry is recorded on your credit report and can make your score drop. Therefore, it’s important to maintain a single application with one lender so use realisticloans.com to reduce the effect on your credit score.

Go Through the Terms of the Loan 

A number of lenders hide crucial information in the final paperwork, such as interest rates, penalties imposed on late payments, and the like.

It is important that you take your time when signing these papers. Go through the details and pay special attention to the fees involved, interest rates, and penalties.

Use only Best and Low-Interest Rates Providers

A person can find suitable lending sources online; however, he/she always needs to make sure that he is well checking the interest rates before selecting any institution for borrowing cash. Using your search skill and taking help from trustworthy knowledge providers like nerd wallet would land you on a desired source of lending

Try to Borrow for Long Term 

Borrowing for short term isn’t that much effective than using for long-term borrowing in case of the personal loan. It is another factor that can influence the interest rates ultimately the installments on the loan sum. More affordable a loan is more it will be easy to repay so a positive effect on credit ratings.

Only Borrow What You Need

You may get approved for a personal loan worth $8,000, but do you really need the entire amount? If you don’t, then it’s better for you to stay away from the loan in totally.

Taking out loan amounts you don’t need, will cause financial strain. It will also have negative effects on your credit score, thus staining your report and locking you out of future loans. On the other hand, you can take out small amounts to help build your score without incurring huge debt burdens.

Make All Payments on Time

This is the most important aspect of building a credit score for anyone. A single late payment can derail your journey towards good credit.

After your loan approval, the lender will offer you a payment schedule indicating the exact dates you should make your payments. To be on good terms with the lender, you have to adhere to the schedule.

If for any reason you think you’ll not make a certain payment on time, you need to get in contact with the lender to work out a way forward.

Go Slow with Other Debts

If your main aim in taking out a personal loan is to open doors to other loans, if you can make payments, your score will rise. This means you’ll have access to other loans.

While this may be good news, you need to tread with caution because applying for more loans can damage your credit score. Also, make sure you keep an eye on your credit limits. If they are close to their limits, the credit utilization ratio will rise. If the figure in this ratio is too high, your score will drop.

By now, you understand what a personal loan is, how it makes an impact on credit rating. You also know how to go about boosting your score using this loan. With this information, you can gauge whether a loan like this is the best thing for you.

Photo: Daily News Hungary

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