How Personal Loans Can Boost Your Credit Score

Is it possible for a loan to improve your credit score?

After all, a loan typically means more debt.

When you use a personal loan to consolidate debt, however, you may be able to boost your credit score.

Here’s what you need to know and how it works.

What Is A Personal Loan?

A personal loan is an unsecured loan typically from $1,000 – $100,000 with fixed or variable interest rates that can be used to consolidate debt or make a large purchase.

The term “unsecured” means that there is no underlying collateral attached to the loan.

For example, if you borrow a mortgage for your house, your mortgage is a “secured” loan in which your home is the collateral. If you default on your mortgage, your lender will then own your home.

The interest rate on an unsecured loan such as a personal loan is higher than the interest rate on a secured loan such as a mortgage because the lender is assuming more risk.

However, interest rates on personal loans are often much lower than the interest rates on credit cards, which typically range from 10-20% (or higher).

Depending on your credit profile, you may be able to qualify for a low-interest rate personal loan and save money compared to a credit card.

The interest rate on your personal loan will depend on several factors, which may include your credit score, credit history and debt-to-income ratio.

The stronger your credit profile and history of financial responsibility, the lower the interest rate you can expect.

When Should You Use A Personal Loan?

Personal loans are best for purchases that you plan to repay in less than five years.

Unlike student loans or mortgages that are spent on specific purchases such as education or a home, respectively, personal loans can be spent at your discretion.

Therefore, you have more flexibility and personal choice when using a personal loan.

1. Debt Consolidation

Debt consolidation is one of the most popular – and smarter – reasons to obtain a personal loan.