A short-term loan has some of the greatest flexibility in how you use your funds. Questions about how you intend to use the money are more about your payment ability, rather than trying to restrict you from getting a loan. Regardless of the expense involved, you can be sure of their helpfulness in some circumstances.
Personal loans usually involve a higher interest rate because many are unsecured. Your debt-to-income ratio and credit history will have the greatest impact on the interest rate. Secured personal loans involve a car or some other type of property offered as collateral. Defaulting on one of these loans can severely damage your credit score because payment history accounts for 35% of the score.
Some of the circumstances that may make a loan a better option include not having collateral, having too low a credit card limit, and having a loan be the least expensive option. We’ll dive into how you can decide whether one of these loans is a good option for you.
A Short-Term Loan Can Help Your Credit History
When you have a history of missed payments, paying off a personal loan on time may help your credit improve. Credit card users can benefit from the addition of a loan to their credit mix. Different types of debts that include loans show lenders that you can reliably repay.
However, you should avoid taking out loans with the specific purpose of boosting your credit score. Keeping the amount of credit that you use at any time down and paying your bills on time will do more for your credit profile in the long run. A loan may help when there is a legitimate need that other credit products are not the best options.
Paying for a Major Life Event Can Be Tough Without a Loan
A short-term loan can be a more practical solution for paying for life events like a wedding or milestone birthday or anniversary. Borrowing to help cover the costs of events like weddings or bar or bat mitzvahs has become a common practice. Some may decide to borrow money to fund their “trip-of-a-lifetime,” like a cruise. However, loans are best when you have a reasonable chance of repaying on time, otherwise, scaling back might be a better option.
Using a Short-Term Loan to Pay Off High-Interest Debt
Although there are many options for paying off high-interest debt, personal loans can be a reliable one. They can be obtained quickly and a lower credit rating won’t preclude you from getting one.
Another option is to take out a new loan to replace an existing personal loan with a higher interest rate. However, you will want to make sure that the older loan has no prepayment penalties. Other fees you will want to watch for include application or origination fees.
Paying for Home Improvements and Big Purchases
Major home repairs, heating or cooling system upgrades, and expensive appliance purchases can all be good reasons to take out loans. Paying for any of these with credit cards or using seller financing can be expensive. However, you will want to weigh out all these options before settling on a final choice to make sure you have made the right decision.
Consolidating Your Credit Card Debts
Taking out a loan to pay off outstanding credit card debts can be a great idea if the amount of debt that you hold is high. Personal loan interest rates can be lower than credit card rates, but you’ll want to compare before doing anything. If you lower the interest, you will be able to pay off your debts faster and keep track of a single payment, rather than multiple payments.
Loans are often helpful under the right set of circumstances. If you’re seriously considering the benefits of short-term loans, contact us to find out what the best options are for your circumstances.