Personal loans are commonly used to cover unexpected expenses, but they also offer another benefit that’s often overlooked. You can also use the loan proceeds to help keep more of your hard-earned money in your pocket. In some instances, a personal loan can also give your credit score a boost and help improve your overall financial health.
1. Consolidate credit card debt
If you’re struggling to make the minimum payments on your credit cards, a personal loan with a lower interest rate may be the best option to help you save money and pay off your debt. Some lenders even have personal loans designed for that specific purpose.
Personal loans typically have lower average interest rates than credit cards. For example, as of May 31, 2022, the average credit card interest rate was 16.31 percent, while the interest rate on the average personal loan was as low as 10.28 3 percent.
To improve your chances of qualifying for a lower rate on a personal loan, focus on improving your credit score. Two ways to do this are to pay down your debt and make sure you pay your bills on time. If you don’t have time to wait until your score improves, try applying for a loan with a co-signer or co-borrower who has better credit.
2. Finance a one-time big expense
When big moments happen in life and you find yourself in need of cash for a large one-time expense, a personal loan may be the most practical and inexpensive way to borrow money for that item or experience. Even if you have all or a portion of the funds on hand, you won’t have to drain your savings account to cover the expense or make the purchase.
Because lenders typically allow you to use a personal loan for almost anything, it can be used to pay for a vacation, wedding, boat or one-time medical procedure. If you decide to take out a personal loan for a want and not a need, calculate your loan payments to see if you can afford to repay the loan. Using a loan calculator may help.
3. Ditch high interest rates
A good strategy to ditch high interest rates sooner could be taking out a debt consolidation loan to consolidate multiple debts. Ideally, the interest rate on the new loan should be lower than the rate you currently have.
Consider paying more than the minimum due each month to possibly save hundreds or even thousands of dollars in interest. Before you do this, make sure your lender doesn’t charge you a prepayment fee.
Another alternative to using a personal loan to ditch high interest rates is to just focus on paying down your debt using the debt snowball or debt avalanche method. Depending on how much debt you have and your financial situation, that may work out better than taking out another loan to pay off your debt.
4. Increase your credit score
Beyond saving money, a personal loan can also give your credit score a boost. If you have credit card debt and are spending close to your spending limit every month on your cards, your credit utilization ratio will increase and lenders will consider you a higher risk. Personal loans can help with credit utilization if you use the loan proceeds to pay off your credit cards.
5. Avoid pesky pop-up fees
If you decide to take out a personal loan, reviewing the lender’s fees, if any, before accepting the loan can save you money. Common fees include late payment fees, prepayment fees, returned check fees and origination fees. The lender will share this information with you when it sends you the Truth-in-Lending Disclosure — a document that outlines the loan’s APR, fees (if any) and finance charges.
Knowing the fee structure before signing your loan agreement will help you avoid any pop-up fees.
The bottom line
Using a personal loan to refinance credit card debt can save you a ton of money if you secure a lower rate. In addition, using one can help you save on your dream wedding or vacation if you choose a loan amount you can comfortably repay.
However, taking on a loan you can’t afford for wants should be avoided, if possible. Doing so can put you in a bad spot financially and ruin your credit if you miss a payment or default on the loan.