One
of the most popular options for a lot of individuals today financially is
taking a Personal Loan. Personal Loans
allow you to take a smaller amount from a bank to finance any immediate
requirements you might have. It is a great way to consolidate your finances and
make sure that you’ve got everything in check when it comes to covering smaller
debts.
With
Personal Loans gaining popularity of
late, you can also use it to consolidate any debt that you might have. If you
use a Personal Loan for the same, you will also be able to boost your credit
score at the same time. Before delving into how you’ll be able to do, take a
look at what Personal Loans are and how they work.
What
is the Personal Loan exactly?
An
HDFC
Personal Loan is generally
an unsecured loan that can be anywhere between Rs. 10,000 to up to Rs. 40 Lakhs.
They have fixed or variable interest rates and can be used to consolidate any debt or to make large purchases.
Unsecured loans are generally defined as
having no underlying collateral that is attached to the loan.
Most loans,
such as a Home Loan or Business Loan require you to declare collateral such as your other assets when you
pay it back. The mortgage is a type of “secured” loan where your home is the
collateral. If you do not pay it back and default on the mortgage, your home or
whatever the mortgage is will end up getting seized by the lender. The interest rate for an unsecured loan is higher than
a secured one, as unsecured loans carry more risk compared to a secured one.
The plus point is that they are lower than interest rates on credit cards,
which range at 10-20{2a02a740f1c2594cbe2a923dc8e449dad4989327db9d6e66263aeaf5e0ae13ce} or even higher.
Based
on how good your credit profile is, you’ll be able to qualify for an Online Personal
Loan with Low-Interest Rate and save
money when compared to a credit card. The interest rates on a Personal Loan
depend on many factors including credit history and credit score along with the
debt-to-income ratio. The better your credit profile and financial
responsibility, the lower the interest rate you can expect.
When
should you apply for a Personal Loan?
Personal
Loans are great for any purchases that you are planning on repaying in less
than five years. Unlike mortgages or student loans which are spent on specific purchases like a home or
education, Personal Loans can be used however you wish to spend them, thus
giving you more flexibility.
Consider
why you might have acquired a debt amount and understand how or why of lowering
interest rate with a Personal Loan. There might be a few reasons:
- Are you making impulse purchases?
- Are you overspending?
- Do you require more income to support
spending or reduce spending?
Creating
a monthly budget to monitor the expenses and income will help you manage the
monthly cash flow better.
Here
are a few reasons to apply for a Personal Loan to improve credit score:
- Credit
utilisation:
The
credit utilisation is generally reported
straight to the credit bureaus at the end of the closing date. Credit utilisation is the relationship between your
credit limit and spending in a given month.
Here
are a few ways to manage credit card utilisation:
- Ask your lender to raise the credit
limit - Set up balance alerts that are
automatic - Instead of paying a balance with one single
payment at the month’s end, you can make multiple payments right throughout the
month
The
online Personal Loancan
also help with credit utilisation and can
improve your credit score by replacing Credit Card debt with a Personal Loan. A
Personal Loan is more of an instalment loan, which means that there is a fixed
repayment term. Credit Cards are revolving loans that do not have any repayment
terms.
When
you swap Credit Card debt for Personal Loans, your credit utilisation can get lowered and also diversify
the debt types.
- Medical
Expenses:
If
there are medical emergencies or an expense that is unexpected where you cannot
pay the full amount upfront, a Personal Loan is a great solution. You can
qualify for a loan amount that’s higher with a Personal Loan than with a credit
card which may be necessary when it comes to health expenses.
- Home repair
or home improvement:
If
you need to complete any home repairs suddenly, and you do not have the funds
to go for a home equity loan, refinancing a mortgage
or accessing a line of credit, then a Personal Loan is a valid option. It makes
perfect financial sense for a home renovation project if it improves the
overall financial value of your home.
- Other uses:
Personal
Loans can be used to help pay other important events like an engagement ring,
moving places, weddings, honeymoons and more. Like any other obligation of
debt, you must ask yourself whether you really “need” or “want” the money.
As
an example, take marriage. If you’re looking to get married and do not have the
necessary resources for your wedding, it is always better to consider a smaller
wedding and find other ways to cut costs without having to borrow. Even if that
isn’t feasible, a Personal Loan can save a lot of money from the interest costs
as compared to a credit card. Ensure that you can pay the loan by the end of
the term.
A Personal
Loan shouldn’t be an excuse for you to acquire any more debt honestly. It is a
useful tool that can help a smart borrower get debt-free faster and move
towards the path of complete financial freedom.
