Most people are terrified of debt and avoid loans except for maybe a home loan or a car loan. Personal loans are something people usually shy away from mostly because there is no particular use for it.
Home loans are used to buy a house, car loans for cars. But what exactly are personal loans?
Personal loans are unsecured loans usually with a fixed interest rate. When we say unsecured, it merely means that you do not need to put up collateral in order to apply and get approved. Usually, the interest rates in personal loans are less than those of a credit card.
Personal loans can be used for just about anything — from funding your dream vacation to paying off those debts that have been hanging over your head. They’re helpful and can be used to your advantage.
One big advantage of taking out personal loans is it can help build up your credit score. Your credit score will tell financial companies how good of a payer you are. Banks and loan companies base the approval of your loans through background checks and credit rating–some companies even look at it before deciding to hire you.
If you have no credit history or have a bad rating, the chance of your loan applicating being approved is zero. Taking out a personal loan could help you start building up your credit score, and in doing so, open you up for more opportunities financially.
You can also use a personal loan to help build your savings. How?
If you have credit card debts and/or high-interest debts (like student loans), you can take out a personal loan to consolidate everything. Because personal loans have lower interest than credit cards, you can cut the interest of your different, high-interest debts by as much as 50%.
Consolidating your debts would mean, instead of owing several banks money, you only owe one bank, and with a lower interest rate to boot. The money that you save by having your interest rates cut can be used to start a savings fund or emergency fund, two accounts that you need to have for rainy days.
They could also save the day when the going gets tough and you need a specific amount of money at a time when your funds are running low. You can take out a personal loan to help tide you over. Just make sure that you pay your debt in full and on time.
The shorter the period of the loan, the higher you pay per month but the lower the interest rate. So consider what amount you can afford to pay back monthly so that you won’t miss any payments and will not bring your credit score down.
The flexibility of a personal loan is a positive thing as long as you know your capabilities financially, i.e. what you can pay realistically per month, how you can make personal loans work to your advantage, and you have the discipline to pay back what you owe on time.
This article originally appeared here.