Most people today understand the importance of proper financial planning and money management, which helps them take the necessary steps to inculcate good financial discipline. However, despite their immaculate financial planning, people often find themselves facing the problem of a shortage of funds. At such time, availing of long or short term loans can prove to be the best solution for resolving the financial problem. The approval of most loans is impacted by the credit score of the applicants, which is why people with a poor or even a good credit score need to take timely measures to boost the same. One effective strategy for improving credit score quickly and consistently is availing of personal loans.
Why Opt For Personal Loan?
When it comes to improving the credit score, almost any type of loan can prove beneficial. So this naturally leads to the question of what makes personal loans the best choice in this context. The answer to this question lies in the fact that personal loans offer various benefits as compared to other popular loan options and can help improve the financial stability of the applicants besides having a positive impact on their credit score. The most important of these benefits are listed below.
- Personal loans are unlike specialized loans and provide the borrowers the freedom of using The disbursed amount for fulfilling almost any financial purpose.
- These loans are unsecured, which eliminates the need for the borrowers to arrange any collateral as security for the availed loan amount.
- Many financial institutions offer personal loans even to individuals with a poor credit score, which allows them to improve the same.
Using Personal Loan To Boost Credit Score
While a personal loan can be used in different ways by the borrowers to boost their credit score, the most popular and least risky methods are discussed in brief as follows.
Using It For Debt Consolidation
One of the most common ways in which personal loans are used for improving credit score is debt consolidation. This essentially means that the borrowers use the funds of the personal loan for paying off their multiple debts in total along with their respective interest amounts. This ensures better management of funds for the borrowers as they are now required to repay only a single EMI which in most cases would have a relatively lower interest rate as compared to the combined interest rates of their existing loans. This method helps the borrowers reset their account balance and improve the credit score by making timely payments of new EMI’s.
As Credit-Builder Loans
The concept of credit-builder loans is relatively lesser known as many people believe them to be counter-intuitive. This is because the borrowers using this method need to make fixed monthly payments towards the loan amount. Only when the amount is paid in full along with the interest, do the borrowers get access to the disbursed amount. By making the payment in advance, the borrowers build their creditworthiness and this helps in improving their credit score significantly. Most importantly, this method ensures that by the time the last installment is paid, the borrowers can access the disbursed amount without any restrictions and conditions.
Establish A Reliable Credit Payment History
The credit score is mostly based on the past behavior of the borrowers concerning the repayment of their loans. If a borrower has defaulted even on a single payment of instant payday loans or any other debt he/she might have availed, it has a deeply negative impact on their credit score and creditworthiness. Opting for a personal loan to be used for some constructive purpose, helps the borrowers restore their creditworthiness. However, for this, they need to ensure that they pay back each EMI in time to avoid any further deduction of points from their CIBIL score.
Risk Factors That Borrowers Need To Be Aware Of
Although the above-mentioned methods can help borrowers enhance their credit score, the process also comes with some risks that they need to be aware of. The brief details of the most important of these risks are given as follows.
Can Result In Hard Inquiry On Their Credit Report
Most borrowers can expect what is known as a “hard inquiry” on their credit report. This inquiry might result in a temporary decline in the credit score of the borrowers and which might get resolved within a few months. However, if the borrowers are shopping around for the loan from multiple providers, it can cause greater complications for them due to the initiation of several credit report inquiries.
An Increase In The Interest Rate
Many times, using a personal loan for debt consolidation may result in enhancing the overall interest rate payable by the borrowers. This might happen with borrowers having a low credit rating and thus get a personal loan at a higher interest. Moreover, the loan amount actually approved by the lenders might not be enough to cover all the existing debts and their interest.