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% 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?
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.