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Improve Your Finances with a Personal Loan

Illustration of a rating system going from poor to excellent. 

You might think of taking out a personal loan as a negative thing, because ultimately it adds to your debt. But a personal loan can actually be a great tool to help you improve your finances, not to mention your credit score. Consider these three ways that a personal loan could help you get your finances on track, whether you’re raising your credit rating, paying off debt, or trying to reach the next phase in your financial journey:

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  1. Know Your Options — Some financial institutions might be willing to grant you a loan for unexpected expenses, such as medical bills, auto repairs, home repairs, or unexpected travel for family emergencies. Getting a personal loan in these situations could cause an initial dip in your credit score, but if you’re on track to pay off the loan responsibly, it could improve your credit in the long run. Done right, a personal loan can be a great way to practice responsibility and an excellent alternative to another high-interest credit card, which will most likely have higher interest rates. Understand that taking out a loan will add another bill to your monthly expenses. It’s a wise option for those who have a solid action plan to make the additional payment consistently and on time. Take it seriously though, and work with a lender you trust.
  2. Build Your Credit — If you have a low credit score and find it hard to get good rates when trying to buy a car, home, or even apply for credit cards, a personal loan might help. You could take out a very small personal loan that has low monthly payments. Every month that you make your payment on time, your bank will send a positive credit report to the credit bureaus. And because your payment history makes up 35% of your credit score, this is a relatively easy way to improve your credit. Improving your credit score isn’t an overnight process. Remember to be patient and consistent. It takes time and commitment. A one-time personal loan cannot solve chronic money issues or poor spending habits.
  3. Consolidate Your Debt — Consolidating debt means rolling multiple loans into one loan, oftentimes (but not always) with a lower interest rate. If you have high-interest debt, you may qualify to take out a personal loan and essentially restructure your debt, possibly with a lower interest rate. The benefit is having only one payment to manage, which can help you stay organized and not miss payments. Plus, you could save hundreds or even thousands of dollars in interest over the course of a few years, depending on how much debt you have. It’s typically a great option, if you qualify. It depends on what kind of debt you have and how secure you are, in the eyes of the financial institution you’re working with. Your best bet is to consult with a reliable lender who will explain your options and help you understand your personal best next steps.

Ultimately, a personal loan isn’t for everyone, but it can be helpful if you’re patient, disciplined, and ready to take control of your financial well-being.