Personal loans are famous for their flexibility, though most people fail to realize that they can also be useful in repaying your outstanding debts. It might seem strange that debt can be used to repay debt in an effective manner, but that tends to be based on little more than superficial impressions.
Here are some tips for using personal loans to help you reduce your outstanding debt:
Borrow at Lower Interest Rates
Assuming more debt to repay outstanding debt means replacing one short-term debt obligation with another. However, that can still be worth it so long as the interest rates on the new debt are lower than those belonging to the debt being repaid.
Shifting the burden from more expensive debts to their cheaper counterparts is a time-honored practice, something for which personal loans are well-suited because you can wait and shop around until the interest rates are favorable. Remember that the interest charged is calculated as the principal multiplied by (1 + i)^n – 1, where i represents the interest rate and n represents the number of time periods in question.
For calculating annual interest on debt that is compounded multiple times in the same year, n is represented by the number of times that interest is calculated while i is the stated interest rate divided by n. For example, 12% compounded semi-annually means calculating 1.06^2 – 1 for 12.36%.
Borrow to Boost Income
You have a couple of methods to speed up the reduction in your outstanding debt, either you can reduce your debt and thus your short-term debt obligations, or you can boost the income with which you can service those obligations.
Most methods for boosting income are long-term rather than short-term prospects, but there are revenue-producing investments that can begin paying immediately. Bonds are perhaps the most common example, though preferred stock shares that pay regular dividends also merit consideration.
Similar to paying down debt using more debt, it only makes sense to borrow for investment, if the rate of return on the investment is higher than the interest rate charged on the personal loan. You must keep in mind that potential investments can come with a range of risks, with riskier investments paying higher rates of return to attract investors.
Although investing in riskier investments using borrowed funds can be tempting, you should only do so if the expected rate of return is higher than the interest rates on the loan and even then, you can still lose your investment.
The expected rate of return is simply the sum of all expected outcomes. Using a simple example, if an investment has a 50% chance of no return and a 50% chance of a 12% return, then its expected rate of return is 6%.
Borrow to Boost Morale
Maintaining good morale is important if you are ever going to repay your outstanding debt. Each debt cleared is a small triumph that can help keep your motivation strong, while each day spent paying down debt with little visible progress saps that same motivation.
As a result, it can be worthwhile depending on your current state of mind to take out a personal loan to clear out some of the smaller debts even if the interest rates are not better.
Peter Coppola is a personal finance and insurance expert. He mainly writes for personal finance and insurance blogs. Click here to discover more about short term finance options.
Finding Low Interest Personal Loans Online – Know The Trick
When you are taking out a loan, one of the greatest concerns is the interest rate that you have to pay on loan. With the current condition of the economy, banks have increased their lending rates quite a bit, even for the ones who have an impeccable credit record.
Thus if you want to get a low interest on your personal loans, then you have to do quite some amount of background work. Peer-to-peer lending, more commonly known as social lending, gives you a shot at lower interest rate personal loans. The processes you can go through to get personal loans having low interest rate are as follows:
- Find out the source – One of the main reasons why you are charged abysmally high interest rates on unsecured personal loans is because the risk of default is high. If you default on the loan that you are taking, then the entire liability falls on the bank and it is the sole entity bearing the burden of the loss. On the other hand, when it comes to peer-to-peer lending, there are a number of investors who pool together their money and then form various packages to lend them out. This is the reason why they are more commonly known as social lending. Due to the diversification of portfolios, the risk is mitigated. Thus in this process, the money you will borrow will come from a number of people put together, so the amount they are individually lending is small and as a result, the risk they are undertaking is also small. This is the main reason why the interest rate in these kinds of loans is lower.
- Prepare the information required – When you are applying for a personal loan from a lending network, you are required to fully furnish them about all your background information. The most common queries would be the reason you require the loan, in what use you will put the money to, and what are the ways and means you have to pay back the debt.
- Provide necessary paperwork – Along with the information regarding the loan, you will also be required to provide personal financial information and paper works. The most important is your credit history. You should get a copy of your credit report from any of the three major credit bureaus and look them up for any glitches. If you have wrong information or defaults which have been cleared then immediately inform the bureau and get it corrected on your credit report. This will increase your credit score. The higher score you have, the better creditworthiness you have. This means you will get the loan at a lower interest rate. You are also required to find out the number of delinquencies you have had in the last two years. Apart from this, you are required to make a cash flow statement in which you have to show explicitly the amount and sources of income you have per month and the expenses that you incur per month.
When you are ready with all these, then you can apply for the loan. You should keep in mind that applying for personal loans online can get you a much lower interest than your current bank.
However, it is very important that you seek advice from a finance consultant on loans and personal finance before you apply for a personal loan online.
You should also do a background check on different consumer forums about the social lending network from which you are planning to borrow money about their credibility and customer service.
Effects Of Credit Score on Personal Loans
Do credit and finance industries commonly use the term credit score? A drastic change can occur in a person’s financial career just because of these two simple words. Creditors might turn their back on you just because of these scores or new financial avenues might get opened for you because of them as well.
There are a lot of factors that make this score important and it is therefore important for a person to maintain a score within the good score range to ensure their financial well being. There is a lot of information that a person needs to be aware of in order to understand this score better.
Usually what people want to see in their credit report is a score within the good credit score range. You will be considered a potential client and financially stable by banks and lenders if you have good credit. FICO which stands for Fair Isaac Corporation is the commonly accepted scoring system.
There are many websites which offer a 30-day trial or those which are absolutely free, that provide you with your FICO credit score. When it comes to monitoring their credit rating people should definitely make use of service but at the same time should be careful enough to avoid falling prey to scams.
It is always better to have a higher credit score even though it ranges from 300 to 850. A good credit score range is between 760 and 849, which means that you have an excellent score.
You can be fully assured that you would receive the best terms and rates without many problems from lenders and banks if you have such a credit score. You can even get a great interest rate while applying for credit cards and loans if you have a credit score around or between 700 and 759.
If your score is not within the good credit score range but is somewhere around or between 620 and 699, you might not get a good interest rate but you would still be eligible for a loan application.
You will surely have a hard time applying for credit cards or mortgage if you have a poor credit score which falls below 619. There is a faint chance that funds with a limited amount with a very high interest rate might be lent to you by a few banks if your credit score is really poor.
Anyone who needs to apply for big loans should essentially have a credit score within the good credit score range. Whenever a person applies for a car loan, credit card, or mortgage, their score is always checked by the banks.
You can make sure that your score stays in good shape in a variety of ways. Paying all your bills and obligations on time is the first step to maintaining a good credit score. Your score is also affected by your credit history. Since younger people do not have enough credit history backing them therefore their credit score is generally lower.
The best way you can prove your long credit history is by holding onto your first credit card. You can even expect to have a better rating if you have a variety of loans. On the other hand, your score can also be affected if banks get a warning that you have applied for loans too often.
Your credit score can also be affected in a negative way if you got a really big loan. It always bests that you know your rating before you apply for a loan. This way you can easily correct any mistakes that might occur.
To avoid being rejected for a loan it always better to fix your score and bring it within the good credit score range before you apply for any loan. Having a good credit score is definitely not a guarantee but it certainly increases your chances.
A higher interest rate might also be applied by the banks which are really strict. Nonetheless, you can easily choose from a good bank or a lending organization if you have a good credit score range. All you need to do is start fixing your credit score and there are a variety of other ways to improve it.
Keeping an eye out on the personal loans available to you is a good way to spot a deal when it comes up. Take advantage of such opportunities even if you are struggling to repay your existing debt because personal loans can provide a much-needed boost to your efforts.