Major expenses like home remodelling, wedding, or an unexpected tax bill may cost you more than what you have in your savings account. You must have thought- taking out an unsecured personal loan could be the answer.
Getting an unsecured personal loan may be a good idea if it helps you save your minimal savings. However, before applying for an unsecured loan, understand the benefits, risks and impacts on the credit score.
What does an unsecured personal loan imply?
An unsecured personal loan is a loan that does not require any collateral. It is the reason these loans have quick turnaround times. It is ideal for individuals with low credit history needing quick finance for their needs.
You can use it for any purpose as these are personal loans.
The terms, interest rates, and the repayment amount remain the same until the loan period. However, repayment and interest rates may increase if you miss or skip a payment. The interest rates on these loans stay competitive but are still lower than that of a credit card. It is the reason most individuals use it to pay their credit card debt.
How do unsecured loans boost the credit score?
Your credit score is a mixture of 5 components- payment history, amounts owed, length of credit history, new credit, and credit mix. Depending on the unsecured loan usage, you can improve your credit score. Here are some ways to do so:
1) Contributing to a credit mix
Having different types of credits or debts in your profile helps you boost your credit rating. For example, if your credit profile reveals- credit card debt, payday loan debt, or revolving credit, you have a healthy credit score. A personal loan is an instalment loan and usually lasts for at least a year. It’s enough time to build your credit history by paying regular instalments on a long-term loan.
2) Helps you ensure a positive payment history
A positive and sound payment history reveals responsible credit management. It proves your credibility towards the debt.
Alternatively, unpaid debts, long payment gaps, non-repayments, and rollovers cast a negative impression and impact your credit score. Thus, if you take a payday loan for your short-term needs, ensure regular payments. It helps build credit history.
3) Improves your credit utilisation ratio
Personal loan indirectly helps you build a strong credit utilisation ratio. It is the ratio of your credit usage to the available credit. If you use more credit than what’s available, your credit score becomes negative. Alternatively, if you keep your expenses, credit card utilisation and other aspects within a limit, it ensures a positive credit score. It reveals your payment potential and helps you qualify for better-interest loans.
4) Settle debt with an Unsecured debt consolidation loan
Individuals struggling with poor credit history find it hard to qualify for important loans. For example, if you want to buy a car dearly but lack a good credit history, you may either not get it or get costly interest rates. Thus, the first thing to do here is deal with your debts. For example,- you can reduce the debt burden with unsecured loans for bad credit scores.
You may get one without collateral if you have a good loan repayment ability. You only need to provide detailed income proof to get the loan. You can provide a salary slip, pension slip, or part-time payment.
5) Provides 30 days more to pay the dues
Unsecured loans provide 30 days extra to clear the dues. It grants individuals the flexibility to pay their dues timely. Moreover, if one succeeds in doing so, the person can save his credit score from dropping below the expected line. However, the loan provider may charge the interest rates for the time you took to pay the amount in full.
What to check before applying for personal loans?
When it comes to choosing the best unsecured personal loan, finding the perfect one seems daunting. Whether you want to consolidate debts, finance wedding arrangements, or cover unexpected expenses, unsecured loans may help. Here are some aspects to check before applying:
a) Check and compare affordable interest rates
The interest rate on an unsecured loan can vary according to the lender and the credit score. Borrowers with a high credit history can get better interest rates than the lower ones. However, compare deals with providers in your area. Go with the one that offers a fair deal with transparent terms and costs.
b) Check the maximum repayment term available
The repayment terms on unsecured loans may vary from a lender-to-lender. Some may offer flexible terms, while some are stringent about a specific term. They allow you to choose the repayment term and the payment frequency. Additionally, others may require fixed monthly payments for some time. Understand the repayment terms before proving your acceptance of the loan agreement.
c) Identify the best ways to improve credit
However, unsecured loans help you build a credit history and improve credit, so getting one is challenging. It is especially difficult for individuals with a low credit history. Thus, work towards improving your credit history first.
For example, Identify your life situations – if you want to own a car but cannot due to poor credit history, co-sign the loan. It implies you can enter an agreement on joint personal loans for a car with someone having a sound credit history. Here, you both will be responsible for payments but the long-term commitment to payments with a person with good credit history helps you build a positive credit history.
d) Check the borrowing amount before applying
It is one of the most important things to consider while applying for an unsecured loan. The borrowing amount decides the entire loan repayment and the final amount you pay. Thus, identify the needs, affordability, monthly liabilities, and savings before choosing an amount.
It will help you borrow only an amount you can manage to pay without defaulting on the loan. Moreover, choosing a flexible amount that meets your needs helps you qualify quickly.
Bottom line
Unsecured loans are a great tool to improve your credit history. The above-listed points stress the same. However, analyse your needs, affordability, and interest rates before applying. Compare your options by checking the APR, fees, and additional costs that increase the overall loan costs. It is because choosing the right loan for your needs directly improves your future credit score. It is the ultimate goal.
Jessica William operates as a Senior Consultant and Chief Content Editor for 10 years at 1Onefinance. She assists the firm in getting a grip on the new lending laws and regulations. She does so by researching the trends, consumer requirements, and new audience preferences. Jessica is responsible for making important financial and administrative decisions.
Apart from helping consumers with the best solutions, Jessica Williams helps them ensure financial stability. She analyse the business data, finances, expenses, and revenue/ income of customers and determines necessary changes. Jessica finished her Doctorate in finance and law and implements her knowledge to the best interest of the firm and customers.