Life happens and sometimes we’re hit with a big expense that we just can’t foot the bill on.
When faced with medical expenses, large moving costs, consumer products, or even repairs on your home, a personal loan might be the answer to getting you the money you need without having to incur large amounts of interest.
Here are five ways a personal loan could help to save you money in the long run.
1. To help consolidate credit card debt
If you’re struggling to make payments on your credit card debt or your minimum monthly payments are too high because of interest fees, a personal loan with a lower interest rate may be the best option to help save money and pay off your debt.
Lou Haverty, a Chartered Financial Analyst, says that taking a personal loan to consolidate credit card debt is rather common.
“Credit cards can have rates as high as 20 percent, and if you have good credit, you could potentially get a personal loan for 8 to 10 percent and save on the interest cost,” Haverty says.
2. To help you finance a one-time big expense
When those big moments happen in life and you find yourself in need of cash for a a one-time big expense, a personal loan may be the most practical and inexpensive way to borrow money for that item.
Haverty recommends taking out a personal loan if you have a large one-time purchase related to medical expenses, vacations, or a consumer good. He also suggests looking into a personal loan if you are a renter and don’t have a home equity line.
“You could finance those purchases more cheaply than with credit cards and you could pay for the expense over a multi year period so you can keep your budget manageable,” Haverty says.
3. To help you ditch high interest rates
Personal loans are more flexible than other lending options. This means that you can agree to a repayment term that may range from 2 to 7 years.
Chelsea Hudson, a personal finance expert, recommends that when you acquire a personal loan it’s important make an accurate plan to pay off your loan before the agreed term ends.
“The good news is that if you pay off your loan before the agreed term, you could save hundreds or even thousands of dollars in interests charges depending on how early you repay your loan,” Hudson says.
4. To help increase your credit score
If you have credit card debt and are spending close to your spending limit every month on your cards, your credit utilization will become high and lenders will consider you a higher risk.
That’s where personal loans come into play. They can help with credit utilization, especially if you replace your credit card debt with a personal loan. That’s because credit cards are revolving loans whereas personal loans come with a fixed repayment term, meaning there’s a timeline for you to pay back the loan. This will help you lower your credit utilization and also diversify your debt types, helping rather than hurting your credit score.
5. To help you avoid pesky pop-up fees
A major benefit of choosing a personal loan when you’re in need of funding for a big expense is that if you vet your lender and look into the details of the agreement, you can make sure there are no costs that will creep up over time.
Without upfront, processing, or early repayment fees, once you payback your loan over the agreed amount of time, you won’t be hit with any additional interest or fees, potentially saving you a significant amount of money.