Most people have some kind of debt and the majority of people have a lot of debt. Getting a personal loan to save money can be the answer to help your debt problem. Better debt managing can save you money later on.
A personal loan is money from a lender that you pay back in monthly payments. You will borrow money with a certain interest rate. The interest rate will depend on your credit score and where you get the money.
While there are different variations of personal loans, there are primarily two main types. Unsecured loans are loans that don’t require any collateral. This means the personal loan finance company makes a decision about whether or not you will qualify based on your financial history and credit score. If you don’t qualify for this type of loan with a low interest rate then your second option is a secured loan. Secured loans require collateral. If you don’t pay back the loan then the lender has the right to take your collateral as a form of payment for the loan. Many of the consumer installment loans available are unsecured and since the lender isn’t able to get your assets if you don’t pay back the loan, the interest rates can be higher compared to other types of unsecured loans.
How to Use a Personal Loan to Save Money
There are multiple ways to use a personal loan to save money, but not everything will suit your situation. To help you get informed on how you can help better your circumstances by taking out a personal loan, we will describe the most frequent situation where you can use a personal loan. If you are in a position to think about a personal loan, you should definitely do it.
Debt consolidation is the process of taking your debts and using one loan to pay them off at once. A personal loan may allow you to have a lower interest rate on your debt to help you pay it offer faster. First, you must add up all your credit card debt and other debt. Most people choose not to include their mortgage in debt consolidation and instead just choose credit card debt. Types of debt that can be consolidated are credit cards, auto loans, payday loans, lines of credit, medical bills, legal debt, and gambling expenses.
Loan Shopping Advice
Once you have an idea of how much debt you have then you know the amount of money you will need for a personal loan. Be sure to do some personal loan shopping, in order to find the best rates. You can choose to visit your local credit union or search online. Online lenders will let you pre-qualify for a personal loan so it doesn’t affect your credit score. In addition to looking at interest rates, you should also look at other fees upfront, such any origination fees that can vary between 1% and 5% of the total loan amount.
One of the best places to look for reputable lenders online is Loanry. This is what we do. We connect you with credible lenders and help you go through this process a bit quicker.
After You Get Approved for a Loan
Once you have the money deposited in your account, which doesn’t take long if you get approved online, then you can pay off your debt and on your credit cards with that money and afterwards focus your attention on payments to your personal loan. When choosing a personal loan, be sure it’s an unsecured loan. Unsecured loans don’t require any collateral. Even though there may be higher interest rates, this won’t put any of your assets at risk if for some reason you have issues with payment.
When you use a personal loan to consolidate debt, you can reduce your interest rate. If you qualify for a lower interest rate then you can use a personal loan to save money. It also helps to lock in a low rate. Sometimes when borrowing money your interest rate is variable and changes. This means that it can go up and down. If you don’t want to owe money at variable rates anymore then a fixed rate personal loan can allow you to know exactly what your payment will be. Avoid personal loans with low teaser rates since these rates do go up. Find the maximum rate you could be charged for any loan you are using for consolidating debt.
Repaying a Loan
With a personal loan, you have a repayment timeline. You agree to pay back the money you take out from a personal loan on a set schedule that is specified in the loan agreement. Since you will have this payment schedule you know exactly when you will become debt-free if you pay on time. If you want to pay off the loan early, check with your lender about any prepayment penalties. Depending on how your interest is structured within the loan, you may or may not have a prepayment penalty. If you don’t have one and can pay off the loan early then that means you can get out of debt faster.
When to Use a Personal Loan to Consolidate Debt
In your order to use a personal loan to save money, it needs to make sense. If you aren’t prepared, taking out a loan can just open you up to spending more money.
You Have a Plan to Pay Debt
Before you make a decision on a personal loan, you need to have a plan. If you just roll up the credit card balances into a big personal loan without an idea of how you will pay it back then there is no point. Will the new monthly payment be feasible? If you are struggling to pay it and end up relying on balance-free credit cards then you won’t be saving any money. It helps to be honest with yourself about your will power and what you can afford.
How Big Your Debt Is
Using a personal loan for consolidating debt is a good idea if you have a moderate level of consumer debt. If you can pay off your debt within the next five years then a personal loan can make sense. If you can expect to pay off the debt within the next six months to a year then a personal loan may not be worth it. The small amount of interest money you can save may not be worth the trouble. If you have no idea how you will pay off your debt in the next few years then a personal loan may not be enough. You likely need credit counseling and a professional that can help you out.
You Have Spending under Control
Consolidating doesn’t just make your loans disappear but instead it moves it around. The debt means you are living beyond your means. If you know the reasons you aren’t charging on your credit cards is just because they are maxed out then a personal loan may actually enable you to spend more. If you have already come to the realization that your spending was out of control and have vowed to lower it then a personal loan can help you streamline and simplify your debt.
Your Credit Score Is High Enough
If your debt has already affected your credit score then a personal loan may not be cheap enough to make it worth it. The credit score requirements for the best interest rates on a personal loan can be high. In order to get a single-digit interest rate, you need a credit score over 760. If you always make your payments on time despite your high balances then your credit score may be high enough to get a lower rate than what you currently have on your credit cards.
However, if you have missed payments then your score likely isn’t high enough for a good interest rate. If you can’t get a lower interest rate than your existing one then you may still have an advantage. You have fixed monthly payments and the loan will eventually be paid off. This can help you from getting stuck in the trap of just making minimum payments all the time and not actually making a dent in the debt.
How to Apply for a Personal Loan
Applying for personal loans can be an easy process, especially if you are working with an online lender. Online lenders will speed up the application process and give the money to you in a short time. Before you settle on any particular lender, you need to check interest rates and their charges. Every online lender will have its own customized rates and structures so you have to shop around before you decide on one. Shopping around is very important if you are trying to use a personal loan to save money. When shopping around and determining your rates, you will be required to provide some information and the lender will look at different factors. Some of the factors lenders will use include your credit score and history, your income and employment, and your debt-to-income ratio.
Advantages of Personal Loans
There are a number of advantages of a personal loan and if used correctly, you can use a personal loan to save money.
Consolidate Credit Card Debt
Debt consolidation might be one of the top three reasons that people use a personal loan. This is one of the ways for a personal loan to save money. If you have a lot of debt, why are you paying through the nose with high-interest rates when you can manage debt with a cheaper interest rate? A personal loan has become an easy-to-use tool for which a consumer can swap out higher interest rate credit card payments with a more manageable schedule of a personal loan.
By using a personal loan to consolidate debt, there are multiple benefits. The first benefit is clearing off debt from credit cards. This is known as revolving account debt and it will usually lower your credit score when the balance is high. The second benefit is changing the debt schedule. Personal loan balances don’t keep growing and are capped. As long as you make your payments then the loan will decrease and be paid off. However, this will only work if you don’t continue to rack up more debt on your credit cards. The third advantage is switching your debt to one payment. This can be easier from an organizational advantage.
Cash flow management can be a big problem, especially if there are multiple accounts to juggle. When you have your debt in one payment, you can pay it right when a paycheck comes in and it’s easy to manage.
Used for a Number of Purposes
Many bank loans are purpose-specific but personal loans can be used for just about anything. The funding gets approved almost immediately when you search for loans online. The lender doesn’t get in your business about what you are using the money for. Instead, they are focused on whether you are a good borrower, don’t have any late payments, and will pay back the loan on time.
Efficient and Convenient
With a personal loan, the process is quick. With a bank-funded loan, the process can take weeks. Sometimes, you may not have eight weeks to wait for financing to happen. There is a very fast approval process when you choose to get a personal loan. It will usually take to three business days. The funding will go directly to your bank account and show up quickly. The payment can also be very convenient. Electronic payments mean you don’t have to remember to put a check in the mail and can make sure you are paying on time.
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How Does a Personal Loan to Save Money Impact Your Credit?
There are a number of ways a personal loan to save money can affect your credit. A personal loan can affect your credit score depending on the different actions you take.
Applying for a Loan
The formal application for a loan will trigger a credit check. This type of hard inquiry will take away some points for your credit score, although it doesn’t make a big impact.
Shopping for a Personal Loan
Many loan places will allow borrowers to pre-qualify using a soft credit check that won’t affect your credit score. This will allow you to shop around for different lenders in order to find the best rate and terms. When you are comparing multiple lenders, inquire about whether or not the lender offers the soft check to help protect your score.
Repaying the Loan
If you repay the loan regularly then this can help your credit score. Your ability to repay a loan will make up about 35% of your credit score. A consistent record for one-time payments helps build your score in the long run. However, if you miss a payment this can negatively impact your credit score. Even if you don’t miss a payment and are just a few days late, your credit can still be affected.
Different Elements of Personal Loans
There are several elements that can affect a personal loan. If you are getting a personal loan to save money, you will need to be aware of these different elements and how they can affect monthly payments.
The interest rate will have a big impact on payments. It’s the amount of money you pay to the lender on top of the money you took out for the loan. The interest rate on a personal loan will stay the same throughout the length of the loan term.
This is the amount of time the lender gives you to repay the loan. Personal loans will have a fixed time length and you need to make the payments on time. Payment amounts will always be the same. The terms on a personal loan can range between just a few months to even longer than five years. Three years is the average that people have to pay off their personal loans.
Borrowing Maximum and Minimum
This is the minimum amount and maximum amount you can borrow. Some lenders can give higher amounts to those with great credit scores.
Like many other loans, personal loans can come with stipulations when it comes to repayment. If you want to repay faster than the stipulated period then be sure to check the prepayment agreement to see if there are any penalties.
Many lenders will apply several different fees to personal loans. These fees can include origination fees and service charges. An origination fee is the amount of money you have to pay at the start in order to have the loan set up. When applying for different loans, be sure to read the fine print so you know what fees you will be responsible for.
This is the amount of money you pay every year in order to borrow a loan. This fee will also include the interest rate. This is the total amount of money you are charged with every year when you borrow for a personal loan. Just like interest, your APR will depend on your credit score.
How Interest Rates Impact a Personal Loan to Save Money
Personal loan interest rates make a huge difference to the monthly payment. Your credit score is one thing that will directly impact the monthly payment. The better your credit score, the lower the interest rate you can get. If you want to consolidate debt then you need a lower interest rate. If you don’t get a lower interest rate, then what is the point? For example, if you get a personal loan of $20,000 and the interest rate on the loan is 10% then the total interest you will be paying is $2,000. If you have bad credit and have a 25% interest rate on the same amount of money you are now paying an extra $5,000 on your loan amount.
Ways to Qualify for a Personal Loan to Save Money
If you are getting a personal loan to save money then it’s about more than just getting approved. You want to get the lowest interest rate possible. The best thing to do is to make sure that your credit score and history are in the best shape. This is what lenders will rely on to establish your finances and borrowing behavior. In order to improve your credit score, be sure to check your credit reports and notice any errors. If you notice an error then file a dispute to fix it. Be sure to fix any late payment issues.
You should also reduce your debt as much as possible. Your debt-to-income ratio and the amount of debt you have helps determine whether you qualify for a personal loan. In order to increase the chances of qualifying for these loans, you should reduce debts as much as you can.
In order to qualify for a personal loan with low income or bad credit, you can get a co-signer. However, if you are looking at using a personal loan to save money then this may not be the best option. Even with a co-signer, you still may have high-interest rates and you are putting your co-signer at risk if you don’t pay back the loan.
One way to make sure you get a good interest rate is by personal loan shopping. Shopping around for personal loans will allow you to identify lenders with flexible loan terms and requirements so you can make sure you are getting a good interest rate and avoiding fees that will not end up saving you any money.
Uses of a Personal Loan
There are plenty of different ways to use a personal loan. It’s even possible to use a personal loan to save money. The flexibility is one of the biggest advantages of using this kind of loan. These types of loan can cover anything as long as you have a credit score that allows lenders to take a chance on you.
Sometimes you may find yourself needing to make home repairs but you don’t have the money to pay a contractor. Emergency home repair loans can help. These loans give you the financing you need and allow you to pay back the loan over a period of time. Home repairs can come in different forms and while there are some projects that you may be able to do yourself, sometimes you just need to call in a contractor.
Car trouble is almost always unexpected and it can be hard to go without a car. A personal loan for auto repair can be a good way to get your car fixed with a lower interest rate and monthly payments you can afford. While there are other options for getting your car fixed, you need to make sure you evaluate them in order to make the best decision. While a car is a necessity, check to make sure the auto repair is worth it before you go into debt.
Medical expenses are one of the top reasons people use personal loans. Examples can include dental work, fertility treatments, and other procedures that generally cost $5,000 or more and aren’t typically covered by medical insurance. Other expenses, such as medical travel, medications, and aftercare, can also be financed by a personal loan for medical expenses.
A Large Purchase
If you need a new washer and dryer or a new computer and don’t have the funds then you would have to dip into savings. Some of these items can end up costing you more than what you have in a savings account. Personal loans will allow you to purchase major household appliances and electronics now when you need them, instead of having to wait months to save up.
Many people want to use the money they get from a personal loan to improve their financial situation. One of the ways to do this is by using a personal loan to reduce higher interest debts. Using a personal loan makes it possible for people to pay down their debts and lower the interest on the debt. When you reduce the overall interest amount, it reduces the amount of money you pay on your debt or the duration it takes to pay it off. You can also make single payments to make managing debt even easier.
Whatever your reason for getting a personal loan is, it’s important to keep a few things in mind. You only want to borrow what you need for the expense and what you can comfortably pay back. Don’t increase your debt for reasons that aren’t important. Taking a personal loan when you don’t have a source of income to be able to pay it back can be a costly mistake. While personal loans are flexible in their uses, this may not be a good strategy for buying gifts, paying for vacations, or other luxuries.
Personal loans have a lot of different uses. It can be easy to apply for a personal loan online where you can shop around for different rates to make sure you are getting the best interest rate possible. In order to use a personal loan to save money, you need to make sure you are getting the best interest rate available.
One of the main advantages of a personal loan to save money is to use it to consolidate debt. When using a personal loan to consolidate debt, you need to know when it’s best to use it. Unless you have a plan in place for debt repayment, a personal loan may not be the best choice. In order to increase your chances of lenders approving you and getting a better interest rate, you need to work on your credit score. Personal loans can also negatively impact your credit score if you aren’t careful about payments or fail to shop around for a loan correctly.
Kevin Strauss is a personal finance writer and homeowner based in the Los Angeles area. Being in one of the most expensive markets in the country, he’s learned to maximize resources to plan for both his monthly expenses and future financial needs. Kevin has a passion for helping those in a similar situation navigate the complex world of personal finance so they can pay down debt, plan for the future and live out their dreams. In addition to covering personal finance in depth on Loanry.com, Cashry.com, Debtry.com, Budgetry.com, Billry.com, Creditry.com and Taxry.com. Kevin shares his expertise with readers who want to create budget-friendly habits across the web.