- 1 taking out a personal loan to build credit
- 2 Best and Worst Ways to Use a Personal Loan
- 3 How Do Personal Loans Affect Credit Scores?
- 4 A Personal Loan with any Credit Score
- 5 Top 4 reasons Vancouverites take out a loan
taking out a personal loan to build credit
Depending on the state this might not be possible. Loans are considered contracts, and various states regulate how minors may enter into them.
For example, in the state of Oregon, a minor may NOT enter into a contract without their parent being on the contract as well. So you are forced to wait until you turn 18. At that time you won't have a credit history, and to lenders that often is worse than having bad credit.
I can't help with the car (other than to recommend you buy a junker for $500-$1,000 and just live with it for now), but you could certainly get a secured credit card or line of credit from your local bank. The way they are arranged is, you make a deposit of an amount of your choosing (generally at least $200 for credit cards, and $1,000 for lines of credit), and receive a revolving line with a limit of that same amount. As you use and pay on this loan, it will be reported in your credit history.
If you start that now, by the time you turn 18 you will have much better options for purchasing vehicles.
Best and Worst Ways to Use a Personal Loan
Image source: Getty Images.
The short answer to "Can I use a personal loan for anything?" is yes. A number of traditional and online options are available for taking out a personal loan, and if you have decent credit, securing this kind of loan can be a fast and easy process. But just because you can take out a personal loan doesn't mean you should. Consider the pros, cons and important factors of personal loans before filling out a loan application.
Good and bad uses for a personal loan
What you use a personal loan for is usually completely up to you, unless the lender has specified parameters for how the loan can be spent. With that in mind, you should also know that a personal loan is a financial tool that should be used responsibly, with caution, and for good reasons.
A personal loan can be useful in your financial strategy if you use it responsibly. A number of good reasons exist for taking out a personal loan, including:
- Education expenses.
- Purchasing or renovating a home.
- Debt consolidation.
Most financial experts suggest that taking out a loan for an appreciating asset is a good use of debt. For example, a student loan that will increase your future earning power or a mortgage loan that allows you to own a home are good reasons for taking out a personal loan.
A personal loan can also be an effective alternative to high-interest credit cards. Many consumers charge their purchases with a credit card and treat that charge as a loan, carrying over their balances from month to month. If you've already amassed a large amount of high-interest debt, taking out a debt consolidation personal loan might be a good idea.
A debt consolidation loan bundles your existing debts into one package that allows you to make one monthly payment instead of many. If you can get a lower interest rate on the debt consolidation loan, the loan might enable you to pay off your debt more quickly. For example, if you have credit card balances with an average 20% APR, you could take out a no-fee debt consolidation loan with an average interest rate of 13% APR. By doing this, you'll save 7% APR in interest charges.
Although you can borrow money to use in whatever way you want, you should exercise caution when using a personal loan. Some poor uses of a personal loan include:
A personal loan shouldn't be used to increase your spending on unnecessary expenses. Consider the fact that a vacation, wedding and material goods last for a short period of time; but if you don't pay it off quickly, the debt can last for years. By taking out a personal loan for consumable debt, you're sacrificing the opportunity to build up your savings or retirement investing -- and hurting your own financial future.
Depending on your financial habits, a personal loan could be a crutch for someone who has a problem with excess spending. Some individuals might continue to add to their debt as they reduce their total loan payments. If you're susceptible to this tendency, you're better off just paying off your existing debt as quickly as possible.
What to consider when taking out a personal loan
Most personal loans are unsecured or signature loans, which don't require a security deposit or collateral. Because of this lack of collateral, the risk is greater for the lender. Thus, interest rates on unsecured or signature loans are usually higher than those on secured loans. Also, the lower your credit score, the higher interest rate you'll pay, because a lower credit score indicates you are a risk as a borrower.
When considering the option of a personal loan, figure out your debt-to-income ratio. For example, if you make $4,000 per month and owe $1,000 in monthly debt payments, your debt to income ratio is $1,000/$4,000, which is 25%. Although there's no such thing as a perfect debt-to-income ratio, a lower ratio is better than a higher one: If your debt payments are too high, after making your payments, you won't have enough cash to meet your day-to-day expenses.
You should consider the details of the various personal loans available to you. Consider whether the personal loan is secured or unsecured, as well as the following factors:
- Interest rates: Interest rates are additional payments -- on top of the amount borrowed -- that you owe the lender for the privilege of borrowing. A personal loan with a lower interest rate and a shorter term will help keep down your total repayment amount. If you choose to take out a personal loan, choose a lender offering the lowest interest rate. The better your credit score, the lower your personal loan interest rates will be.
- Fees: Some lenders offer no-fee loans, which means there's no origination or other borrowing fee. The only liability you'll encounter is the repayment of the sum borrowed and the interest payments. Watch out for personal loan companies that charges high fees.
- Terms: In general, it's preferable to take out a shorter-term personal loan than a longer-term loan. With a shorter-term loan, you'll end up paying less in total interest charges.
- Lender: Vet the lender for your personal loan. Understand the loan fees and credit score required by the specific lender. Read reviews to ensure that you're choosing a reputable firm.
Before committing to a personal loan, you should consider alternative sources of capital. Here are a few suggestions for other sources of funds:
- Low- or no-interest credit cards: Make sure to read the fine print to avoid accruing additional debt and interest payments. Also, it's wise to pay off the charges as quickly as possible to minimize the interest expenses.
- Friends or family: You might consider borrowing from a family member or friend if you need funds for a short period of time and can't access a personal loan. However, this option comes with the danger of negatively impacting the relationship.
- 401(k) loan: Another possible option is to borrow from your 401(k) account. The disadvantage with a 401(k) loan is that you're compromising your future retirement by withdrawing funds from the account. If you take money out of your 401(k) early, you won't be growing your money for your future, and you'll miss out on accruing interest. You also could be subject to fees and penalties. You should only consider borrowing from your 401(k) if you're in a dire financial situation.
Be selective about using a personal loan
A personal loan can be a helpful solution for some financial situations. If you're considering taking out a personal loan, ask yourself these questions first:
- Can you reduce your total debt interest rates with a personal debt consolidation loan?
- Are the personal loan payments within your budget?
- Will the personal loan alleviate a potential disaster, such as the inability to pay a big tax bill?
If you answer yes to one or more of these questions, then a personal loan could be right for you.
Although you are allowed to use a personal loan for anything, look at both the advantages and disadvantages of the loan. The fact that personal loans don't require collateral is beneficial. And if you make your payments in a timely manner, a personal loan could help improve your credit profile.
On the other hand, whenever you borrow money, you're risking the possibility that you won't have the cash to pay the loan back on time, thereby hurting your credit. Do your research and evaluate your personal financial situation before taking out a personal loan. If you take out a personal loan, make sure it's for an important reason -- and make sure to pay the funds back on time.
This article originally appeared at GoBankingRates.
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How Do Personal Loans Affect Credit Scores?
Do personal loans affect credit scores? Like any other form of financing, they can help or hurt ratings – depending on how the borrower behaves over time.
Soft inquiries allow people to shop around for personal loan interest rates without affecting their credit score. The same holds for no credit check options.
However, everything changes once somebody decides to take out a personal loan. The lender will report the activity to the three consumer reporting agencies.
- How to shop around for interest rates
- Factors helping and hurting ratings
- Impact of credit card consolidations
- Effect on mortgage applications
Shopping Personal Loans Won’t Affect Credit Score
Shop around for personal loans in a way that will not affect your credit score. Most borrowers have several avenues to compare interest rates, origination fees, and monthly payment offers from various lenders – without having a hard inquiry appear on their report and hurting their ratings.
Start a personal loan request here. A single soft inquiry will not affect your credit score, but multiple hard inquiries will. Therefore, submitting a single request that reaches a network of possible lenders helps preserve your borrowing qualifications.
Personal loan companies using soft inquiries will not affect credit scores during the prequalification stage. A soft credit check can occur in one of two ways.
- The consumer pulls his or her own file for an updated credit score, which generates a soft inquiry. The consumer inputs the updated rating and other qualifications into the online personal loan interest rate estimator.
- An intermediary agent separates financial and identifying information and presents the qualifications only data to a network of personal loan lenders. Since the lenders never see any identifying information, the bureau logs a soft inquiry on the person’s file.
Keep in mind two things that can happen after the prequalifying soft inquiry.
- The individual decides to follow through and complete an application from his or her chosen lender. The lender will pull a copy of the consumer report, and the bureau providing the file will log a hard inquiry.
- If the individual borrows money, the personal loan will show up on his or her credit report. This most certainly will impact ratings – see more below.
Personal loans with no credit check also do not affect your credit score during the prequalification stage. The lender does not pull a copy of your consumer report when making an underwriting decision. Therefore, the initial process does not result in a hard inquiry on your file.
Once again, keep in mind what happens after the company makes an underwriting decision without a credit check. If the individual borrows the money, the personal loan will show up on his or her credit report. This also impacts ratings – see more below.
When Personal Loans do Affect Credit Scores
Taking out a personal loan will affect credit scores for a simple reason. It will show up on your consumer report about 45 days after the money disburses to your bank account.
Having a personal loan appear on a consumer report can either help or hurt ratings. The result is different for every individual and every situation.
Request a small personal loan to build credit score if you have a short history or lack diversity in your account mix. Make each monthly payment on time to build a solid history.
A small personal loan will influence each of the five main factors making up the average borrower’s FICO score as depicted in this chart.
- Length of history 15% and new borrowing 10% will improve as the account ages
- Types in use 10% will improve if this is your first installment contract
- Amount owed 30% is minimized by requesting a small amount
- Payment history 35% is helped by staying current at all times
Young adults and first-time borrowers often find that credit builder loans with no credit check help them to establish a history on on-time payment. Requesting small amounts is the key for obtaining an approval, and having a manageable monthly payment.
Taking out a personal loan will hurt credit scores if the borrower cannot afford the monthly payment and falls behind. Late payment will adversely impact ratings – just like with a delinquency on a credit card, car financing, or mortgage.
The negative personal loan payment information will display on your consumer report and hurt ratings for a long time.
- Derogatory data reported by the original lender disappears seven years after the date of first delinquency.
- If a collection agency takes you to court and wins a lawsuit, the public record will also display. Judgements and liens disappear seven years after the court filing date.
The severity of personal loan payment delinquencies also hurts ratings differently. A 30-day late does less damage than a charge-off, collection account, or a public record resulting from a lawsuit.
Taking out a personal loan to pay off credit card debt is a good idea if the borrower keeps the revolving balances down permanently. However, far too many people make it temporary – which is a very bad idea.
Debt consolidation typically does not affect credit scores at the beginning – as the plusses and minuses cancel each other out. However, the real impact comes years later. Which scenario describes you?
First, consider the impact of personal loan amounts vs credit card balances on credit scores at the beginning of the debt consolidation process. The borrower still owes the same amount of money. However, the account types are different.
- Credit cards are revolving contracts. Revolving accounts have flexible monthly payments terms and indefinite repayment timeframes.
- Personal loans are installment contracts. Installment accounts feature fixed monthly payments and finite repayment terms.
Credit scores calculate two utilization ratios. A low percentage raises ratings, while a high percentage lowers them. One ratio improves while the other degrades when you consolidate credit card balances using a personal loan.
- Total utilization ratio climbs with new installment contracts
- Revolving utilization ratio drops as credit card balances move to zero
Personal loan interest rates are often lower than for credit cards. The interest savings from debt consolidation can reduce the amount owed over time. Since the amount owed makes up 30% of the average credit score, the savings can lift ratings.
However, the opposite is also true.
Transferring revolving balances to an installment contract frees up open to buy. Open to buy allows people to resume credit card spending after the transfer. Far too frequently, these borrowers find themselves in more trouble than before. Now they owe twice as much money!
An eventual increase in the amount owed hurts ratings.
Taking out a personal loan can also affect your mortgage application in three possible areas. Pay close attention to the potential influence on your credit report and score, debt-to-income ratio, and down payment.
Mortgage loan applications also consider the size of the down payment. The down payment is a critical variable in the Loan-To-Value (LTV) ratio. A large deposit pushes the LTV lower, which improves qualifications.
Using a personal loan as a down payment for a mortgage is very tricky. The underwriters prefer to see borrowers who self-fund their down payment. A large deposit into a savings account is a red flag – especially when it occurs around the closing.
Most mortgage applications utilize a tri-bureau merged consumer report, and a specialized mortgage overlay credit score. A personal loan will appear on the merged file, and influence the overlay rating in the manner already described based on the five key factors.
- Length of history
- New borrowing activity
- Types of accounts
- Amount owed
- Payment history
Mortgage applications also consider the borrowers proposed Debt-To-Income (DTI) ratio. The underwriter calculates DTI by dividing the projected monthly payments by the expected monthly income. Two ratios are important.
- Front-end DTI includes monthly payments for the mortgage principal, interest, real estate taxes, and homeowner’s insurance premiums
- Back-end DTI combines the front-end fraction with all other monthly obligations including car notes, credit cards, and unsecured installment contracts
Taking out a personal loan increases the monthly payment figure in the numerator of the back-end DTI. This pushes this percentage higher, which hurts the mortgage application.
A Personal Loan with any Credit Score
This type of online loan is perfect when you need to consolidate debts. You will not need to back it up by any collateral, such as a car or house: you can get financing for whatever you need. Even financial coaches recommend personal loans for debt consolidation. Applying through Personal Money Service has never been easier.
Go to the application form and fill out the information. Once it's submitted, you should expect to get the loan decision within 60 seconds.
- short and easy application
- 100% safe & secure
- up to 60 seconds
- big choice of lenders
- as soon as the next day
- money into bank account
We work with people who have various credit scores: from bad to fair, from fair to good. Don't assume that you can’t qualify for a loan because of a poor credit score situation. Fill out our quick application and wait for your answer. The best part is that we won't bore you with the long application form and long hours of waiting. Our personal installment loans online won't take you more than 7 minutes because we understand that you want to get rid of your debt ASAP.
We're the best online loan provider. We strongly recommend controlling your personal finances. Yet, if you need to close credit card debts, pay a bill or even fund a big expense, we are always at your services. We are not the direct lender, we help to match our customers with the best online loan lenders.
Use unsecured loans for bad credit and stress less about your finances. Personal Money Service works with a huge network of direct lenders to ensure the quickest way for people to get access to loans. Applying for a loan on our site is not complicated at all. And the advantages you'll get are:
Don't waste your time. Get a loan online.
Professional Financial Help Online
If you are in need of bad credit personal loans for $5,000 that are not secured by collateral, apply to Personal Money Service. Our loan matching mechanism will choose the best loan option according to your credit score. The lender still reserves a right to ask for extra documents that can impact the decision. For instance, it can be a record of your previous employment.
You may need small loans for various needs: minor home repair, an unexpected bill or even buying goods for your small business. No matter what the reason is, you can always rely on Personal Money Service! We offer different kinds of loans. Possibly short-term loans online will meet your needs. Feel free to check out our entire website.
Do you need a fair credit personal loan? We have it all! Looking to borrow money, but have a less-than-perfect credit score? We still recommend turning to us. Consumers in all credit situations and social backgrounds can easily find a fast financial solution with our help. Emergency money help - is our specialty!
Millions of people have chosen to change their personal finance situation. Are you ready to make a right choice?
Apply Now and Get the Funds Sooner
PersonalMoneyService.com is THE place where it is possible to get the money you need within 24 hours or so. We are available round-the-clock, so no need to worry about any unexpected expenses. Forget about your poor credit score, as the lenders we work with will always try to find a financial solution for your case. We are #1 when it comes to small bad credit personal loans online!
PersonalMoneyService.com is not a direct lender, but a service matching the potential borrowers with the lenders able to provide loans to them completely free of charge. After the application is submitted the customer’s details go to the cooperating direct lender. The lender then provides the customer with an agreement that fully discloses the exact APR, fees, terms and conditions associated with the service in accordance with the information submitted by the client. The loan details between the customer and the lender are not in the competence of the Personal Money Service Company. We do not guarantee that the customer will get a loan offer or will be approved for a credit.
The policies and practices of Personal Money Service Company comply with the regulations of Fair Lending laws, Truth in Lending Act among them. The consumers covering their loans are protected by the Fair Debt Collection Practices Act enforced by the Federal Trade Commission. The cooperating lenders from Personal Money Service Network follow federal regulations and states laws for lending within their borders.
Top 4 reasons Vancouverites take out a loan
Savvy shoppers know not to spread their credit cards too thin. After all, a bad credit score is something that will haunt you for a long time to come. If you’re considering a large purchase, it’s often best to avoid using your credit card. A personal loan is often a better alternative.
By taking out a personal loan, you can make better use of your credit score when you borrow anywhere from a few to several thousand dollars on a personal line of credit—which also allows for variable repayment terms to provide more flexibility in how you pay it back.
So what are the most common reasons for Vancouverites to take out personal loans? Let’s examine the top reasons and talk about why they make good financial sense.
Image: Floor construction / Shutterstock
Renovating your home is probably the wisest investment you will make. Why? Because home renovations yield the biggest return. So while you might be borrowing $20,000 to redo that dated kitchen, remember that you’ll reap the benefits when you resell your house or condo.
Just beware that not all renovations are worth the investment. Kitchens, bathrooms and hardwood floors are the best use of your money as are any structural changes that will help save on energy bills like new windows, roofing, or energy efficient heaters. Do your research before taking out your cheque book.
2. Investing in your RRSP (Registered Retirement Savings Plan)
Image: RRSP / Shutterstock
Come tax season (March/April each year), Canadians are scrambling to top up their RRSP contributions. By taking out a personal loan, you’re able to take advantage of an RRSP to lower your taxable income for the previous year as well as build your nest egg for retirement.
Image: Car keys / Shutterstock
Vancouverites are fortunate to have a decent public transit system. However (and this is a big however) public transit isn’t always good enough. Most of us still need a car for work, for family and for fun, but sometimes getting a car, whether through dealer financing or leasing, isn’t feasible.
A smart alternative is to get a personal loan. While a car dealership’s interest rates may be too high, personal loans are often available at prime plus half-a-per cent (depending on when you’re reading this article), which means you’ll pay the car off sooner and that extra money you would have spent will be going into your own account instead of the dealership’s pocket.
Image: Stressed girl / Shutterstock
If you have debt in many different places, i.e. several credit cards, car payments, mortgage, etc., you might want to take out a personal loan from a financial institution in order to repay all your debt. This way, you’ll only have to make one single payment, your personal loan. This is called loan consolidation and it makes sense for most people who are in this situation.
Lastly, remember that it’s important to always pay attention to the fine print. Some personal loans will penalize you if you repay the loan too soon. Consider secured versus unsecured loans as well as the interest rate associated with the loan.
Talk to your financial advisor to see what’s right for you before making any costly decisions. And always take out personal loans from trusted financial institutions. Once you’re confident you’ve found the right institution to lend you the money and the terms are agreeable to you, then you can actually start planning ahead.