Taking a loan might not sound like a way to save money, but we’ll explain that in just a moment.
If you’re like many others and have taken out a loan in the past that you’re still paying for, and it has higher than average interest rates, that debt can have a high cost of borrowing attached.
Read on to learn how borrowing can help you save money, even if it sounds odd, we explain what that can look like for you and provide examples for clarity. While it isn’t the answer for everyone, we also explain how you can work towards putting yourself in a better place so that this strategy can one day work for you as well.
How to Get Ahead with a Personal Loan
Not everything requires a loan, there are plenty of situations where you probably just use a credit card. But when thinking about purchasing a big ticket item of about a thousand dollars or more, it can be time to look at borrowing versus paying with plastic.
With credit cards having an average interest rate of 18 percent, if you qualify for a loan with a better rate then it’s something to consider as it will cost you less overall. Also, when you borrow and make your payments on time, that can contribute towards improving your credit score.
Even if the idea of points and rewards or cashback from a credit card make it seem like this is the direction to go, consider that as you improve your credit score you may qualify for not only better loan opportunities later, but also better credit card possibilities and improving your budget too.
Improve Your Credit Score with a Loan
It might not be obvious to some, but a personal loan can be a great way to improve your credit score. You get to boost your credit score while borrowing with a personal loan by making your monthly payments on time, everytime.
Before you think about borrowing, you’ll want to at least have your credit score in the right place so that you will be able to qualify for acceptable rates. Otherwise, the interest rates might be too high to provide any benefits to you. If your credit score is in the mid 600’s (about average) or less, it is worthwhile to work on improving your credit score before borrowing.
With a fair credit score (600-720) you might find installment loans are your only option. This type of loan doesn’t usually provide the best interest rates. When you have a good credit score of 721 to about 760, the interest rates are much more in your favor. Those with a credit score near 800 or better will see the most benefit and are likely to be offered preferred rates. When your score is below 580, borrowing becomes difficult other than high interest loans. You soon learn the disadvantages of having a bad credit score and how it limits your options.
RELATED: What’s a Good Credit Score?
Your credit score is very related to the type of loan, terms and interest rates that lenders might offer you when comparing. If the need to borrow isn’t urgent, it is very much worth your time to try and improve your credit score to improve your eligibility for better rate loans. While improving your score won’t happen overnight, it’s usually worth doing. Not only does it affect how much a lender might charge for interest rates, it can also influence how much you can borrow along with the length of the term you can get a loan for.
Saving Money with Debt Consolidation
When you have outstanding debt from past loans or carry credit card debt, using a personal loan to pay off what you owe can help you save money that would go towards interest.
The way it works to be effective is you would need to qualify for a loan that has a better interest rate than your combined debt. Suppose you had a balance on a few credit cards that added up to about $10,000 and the average interest rate for the cards was 20%. With a good credit score, you may qualify for a loan to pay off those cards that could be close to 15%. If you paid either off within 5 years, the lower interest rate would save you over $1,600 when comparing the two.
Also Read: How to Avoid High Interest Loans
As another example, perhaps you took a loan a few years ago and still owe $2,000 and the loan had a higher interest rate of about 30%. Over the term that interest would be around $680, give or take a few dollars. If you were able to qualify for a personal loan of about 15% the amount you would pay in interest would be less than half.
As you can see, when you’re eligible for personal loans with better interest rates you can in fact save money through consolidating your debt to pay less interest and keeping more money in your pocket.
When comparing lenders, you should look beyond the rates and also look at any additional fees they might have, such as late fees or prepayment penalties that can also cost you. Learning to calculate interest rates on a personal loan and understanding how there can be a difference between APR and interest rates can also be beneficial when comparing your options.
To get started and take your first steps, you should learn more about how to qualify for personal loans so that you can make preparations and get the best loan options you might qualify for.
- Dealing with Credit Card Debt
- How Bad Credit Can Affect You
- How Smart Borrowing Can Help You Save
- Benefits Of Good Credit and Why it Matters
- How Poor Credit Can Prevent Loan Approval
- Choosing the Right Type of Personal Loan for You
- Personal Loans vs Credit Cards – Which is Better?
- How to Eliminate Credit Card Debt with Personal Loans
- How Loans Work and What to Know Before You Borrow
- Paying Off a Loan Early – Does It Hurt Your Credit Score?
- How to Lower Your Monthly Payments with Personal Loans
Always keep in mind to practice responsible borrowing. This means making payments on time, only borrowing as much as you need, along with taking the time to read and understand your loan agreement so you can avoid unexpected ‘surprises’ regarding your loan.