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4 Ways You Should Be Using Personal Loans

 Personal loan symbolized by business man thrusting handful of dollars bills in your direction

By    |   Monday, 24 September 2018 11:16 AM

Recent data from TransUnion show that personal loans are the fastest-growing consumer debt category in the U.S.

Total outstanding balances in this segment rose from $102 billion to $120 billion in the first quarter of 2018. With low unemployment and more options available for short-term loans, more people are taking out personal loans than ever before.

The growth is likely to continue, as federal regulators are making it easier than ever for financial technology firms to operate nationwide. The Office of the Comptroller of the Currency announced it would offer national banking charters to online loan providers.

Although the boost in personal loan origination is great for lenders, increasingly more people are taking out loans for expenses such as weddings and everyday products. A recent report also shows that middle-class millennials are taking out loans to pay for travel.

Even though you technically can use a personal loan for almost anything, whether you should is a different question.

Here are four responsible ways to use personal loans:

1. Refinancing

One of the most popular ways borrowers use personal loans is to refinance existing loans. You can refinance to get a better interest rate, lower the payments, pay off the loan faster, or change from a variable rate to a fixed rate. And if your credit score has improved, you may qualify for a better rate than when you first took out the loan.

However, refinancing other loan types with a personal loan may not always make sense. For example, student loans come with tax advantages. If you refinance a student loan with a personal loan, you will no longer have the ability to deduct your interest payments. In addition, you won't be eligible for federal student loan benefits, such as forbearance, deferment and income repayment plans.

2. Debt Consolidation

Another common way people use personal loans is to consolidate debt, allowing them to reduce the number of accounts that carry a balance and gain control over their total debt. Personal loans may even have a better interest rate than your outstanding debt, as credit cards tend to have high interest rates. This can enable you to pay off your debt much faster and accumulate less interest.

The main drawback to consolidating your debt lies in how you handle repayment. You'll need to stay on top of your payments and try not to add to your overall debt. Once you pay off your outstanding debt with your personal loan, the balance will drop to zero—but you will still have to pay off that loan. Also, depending on the lender you use, there may be some fees associated with consolidating your debt.

3. Boost Your Credit Score

Taking out a personal loan might help your credit score, especially if you have only one type of debt. Generally, consumers want to have as little debt as possible. But spreading out your debt in multiple forms, like credit cards and loans, can be good for your credit history. Your credit score evaluates your revolving and installment accounts and whether you have a mix of account types. Credit cards are revolving accounts while personal, auto, mortgage and student loans are installment accounts. Having both can improve your credit score.

Keep in mind that you should not take out loans if you can't afford to pay them back. If you want to improve your credit score using a personal loan, you should find one with the lowest interest rate possible. And if you are already carrying a lot of debt, you should pay off that debt first and continue to make your payments on time to improve your credit score, rather than taking out a loan.

4. Home Improvement

If you want to maintain your home or make improvements to increase its overall value, a personal loan may be a good option. Rather than use a credit card, where you may not be able to pay off the balance right away, a personal loan can help with the cost and provide a lower interest rate than you would get with a credit card.

Improving or maintaining your home is important to keep up or increase its value.

However, if you plan to use a personal loan to add amenities that don't actually increase the equity in your home, it might be best to not take out the loan. Instead, you should save up if it's something you really want, but you shouldn't add debt if it's not something you need or can actually afford.

Personal loans have several uses and can be very helpful for those who need extra funds, want to lower their interest rates or aim to consolidate debt.

When considering taking out a personal loan, you should think about the overall value it will add, and whether it's helping you save money, improve your credit score or increase the value of your property. And if you do ultimately decide to take out a personal loan, you should always weigh your options to see which lender offers the best rates and terms.

Your bank or credit union may not be the best option for you, as many online lenders have better rates.

Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.

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Your bank or credit union may not be the best option for you, as many online lenders have better rates.
personal, loans, money, use
Monday, 24 September 2018 11:16 AM
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