Loans have gotten a bad rap lately. Warnings of excess spending and crippling debt have left many consumers afraid to borrow money.
Taking on excessive debt can be a poor financial decision, but at the end of the day, debt is a fact of life for many people. For instance, in South Africa 23.8 million consumers have debt.
In other words, the question is not a matter of whether you’ll have debt, but what kind of debt you’ll have.
If you need cash on hand that you can pay off in increments, there are many benefits of personal loans. These can be a great way to build credit and get the funds you need.
Let’s take a closer look at some of the benefits of personal loans that you should consider.
Personal Loans Can Consolidate Existing Debt
When a consumer has multiple credit cards, it can be easy to rack up a lot of debt quickly. This debt can become difficult to pay off due to high-interest rates. Also, if you have multiple cards, you must make multiple payments each month, which can be hard to keep track of.
One of the benefits of personal loans is the option to consolidate multiple smaller loans into a single loan. For instance, if you have several credit cards and a student loan, you can combine all of these debts into one single debt. There are a few benefits to taking this approach.
For one, when you take out a personal loan, you can negotiate a lower interest rate, which can save you hundreds of dollars. If you want an even lower interest rate, you can offer up a piece of personal property as collateral.
Also, you’ll only have one payment to make each month. This will make it easier to keep track of your payments.
Build Credit or Repair a Bad Credit Score
Having a single personal loan is better for your credit score than having multiple smaller loans. Maintaining a balance on several credit cards can lead to a bad credit score. By contrast, making payments on a personal loan will help repair your credit.
Taking out a personal loan can also be a good choice if you have multiple credits cards that are maxed out or close to maxed out. The larger percentage of your available credit that you’re using, the worse it looks for your credit profile. By consolidating these cards into one loan, you will increase your available credit and improve your profile.
Another reason why credit cards are bad for your credit score is that they’re considered “short-term debt”. One of the benefits of personal loans is that most have a term of at least five years. This longer term debt will add more variety to your profile and improve your credit score.
Diversity in types of credit also helps improve your credit score. For instance, if you add a personal loan to your account, it’ll look better to creditors than if you only have three credit cards.
Keep Your Debt Payments Stable
Part of the problem with credit cards is that they’re a revolving door. As long as you haven’t exceeded your credit limit, you can continue making purchases on your credit card. This means that your debt keeps increasing as well.
Even if you’re making regular payments on your credit card, making more purchases will raise your balance. This creates a cycle that makes it difficult for many credit card holders to ever pay off their debt.
By contrast, when you take out a personal loan, you have a fixed balance. For the entire life of your loan, you will have the same monthly payment and the principal you owe will not get larger.
Fund a Larger Purchase
For people who live paycheck-to-paycheck, it can be difficult to make large purchases. If you tried to save up for a new phone or piece of furniture, it could take several months or even years to set aside the amount you’ll need.
If you take out a loan, you can get the item you need now and pay it off while you are enjoying it. Also, choosing a personal loan is a better option than putting the purchase on a credit card, because the interest rates will be lower.
When you use a credit card, you’re limited to vendors that accept that credit card. Additionally, some places may accept the credit card but charge additional processing fees.
With a personal loan, you get cash in hand. This gives you the flexibility to use the borrowed money wherever you need instead of only at certain locations. You can even use a personal loan to make a down payment on a larger purchase.
Personal loans also provide flexibility for folks with inconsistent incomes. If you work as a freelancer or consultant, you likely don’t get paid on a regular schedule. With a personal loan, you can know that you’ll have the cash to pay your bills.
Pay for an Emergency
As the old saying goes, “Men make plans, and God laughs.” No matter how smart you are about financial planning, the fact of the matter is that life happens.
For instance, you might face a medical emergency where you or someone in your family needs a procedure. Or one of your vehicles could break down and needs repairs.
In these situations, you might need a large sum of money that you hadn’t been planning to spend. A loan can quickly provide you with the funds you need.
Take Advantage of the Benefits of Personal Loans
Depending on your financial situation, there can be many benefits of personal loans. If you’ve decided that a personal loan is right for you, find out how to get a personal loan.