A personal loan is a type of loan that is typically used to consolidate debt, finance a large purchase, or cover unexpected expenses. Personal loans are usually unsecured, which means they are not backed by collateral such as a car or home. This makes personal loans a riskier proposition for lenders, and as a result, personal loans usually have higher interest rates than secured loans such as auto loans or mortgages. However, personal loans can be a good option for borrowers with good credit who need access to quick cash. Check out Credello’s recommendations for personal loans to make sure you get the best value.
The relationship between personal loans and credit scores
Your current credit score can impact your ability to get a personal loan as well as the terms it comes with. If you have a good credit score, you may be approved for a personal loan with a lower interest rate. This can save you money over the life of the loan. However, if you have a poor credit score, you may be denied a personal loan or only approved for a personal loan with a high interest rate. This can end up costing you more money in the long run.
Personal loans in turn can have both a positive and negative impact on your credit score. If you make your payments on time, personal loans can help improve your credit score by building up your payment history. However, if you miss payments or default on the loan, personal loans can damage your credit score. Additionally, when you apply for a personal loan, the lender will do a hard credit inquiry. This can lower your credit score by a few points. However, the impact of the hard credit inquiry will fade over time.
There are a few alternatives to personal loans that you may want to consider before deciding to apply for one. One option is to use a credit card. This can be a good choice if you can avoid high interest rates and pay off your balance quickly. You can also tap into your home equity through a home equity loan, which is an option if you have equity in your home and you’re able to get a low interest rate. Finally, you could consider borrowing from family or friends. Whatever option you choose, make sure you understand the terms and conditions before committing.
It’s important to weigh the pros and cons of taking out a personal loan before you apply so that you can be sure you’re making the best decision for your financial health.