There are several different reasons why you might take out a personal loan. Whether your savings account is a bit slim or your credit score has had a few hard hits, your options may be limited.
The nice thing about personal loans is that they can be used for just about anything, and, in some cases, they can actually help improve your credit score. Depending on your situation and spending habits, small personal loans can be the perfect way to get cash within hours that can be used to pay off student debt with high interest rates, remodel your home, pay off credit cards with high interest rates, etc.
Since personal loans are ‘installment loans’, you receive a lump sum of cash (up to $4,000 with Helix) that you can then repay in fixed amounts on a monthly basis. This can be a great way to start forming healthy financial habits that will put you on the right track toward a higher credit score.
Best Reason to Get a Personal Loan
One of the more common reasons people take out a personal loan is to consolidate and pay off debt from high-interest credit cards. Not only do you end up saving some money, but you also only have to worry about one monthly payment vs. multiple payments toward multiple cards. You’ll have to look at the interest rates for both to determine whether this option will be beneficial.
Another reason someone might take out a personal loan is to cover home repairs or remodeling, especially ones that require cash quickly (ie: broken AC unit, plumbing issues, etc.). The trick is to pay off the loan as quickly as possible, even if that means using the money from a home loan refinance. Also, consider that a home equity loan will have lower interest rates because the home is collateral. The trade-off with that though is that you’re putting your home at risk.
Personal loans aren’t the right solution in all cases though. If there are other assets available that you can borrow against that might have lower interest rates–like a 401(k) loan or home equity line of credit (HELOC)–you should consider these options instead.
Do Personal Loans Hurt Credit?
Short answer: it depends on how you use them. If you make all of your monthly payments, you show lenders that you have a track record of responsibility. Debt isn’t a bad thing, but lenders want to see that you know how to manage it.
If you don’t currently have any credit cards, a personal loan can be a good way to start this process and build up a credit portfolio. Diversifying your credit portfolio can be a positive mark on your credit score as well, so consider combining personal loans with a credit card. Be sure to verify with your personal loan lender that your activity is being reported to major consumer credit bureaus, or those payments won’t affect your score at all.
The nice thing about Helix is that applying for a personal loan won’t affect your credit score in the long run. Though your application is underwritten using Clarity Services, an alternative credit bureau, the inquiry will be reported to the three major credit bureaus we all know and love (Experian, TransUnion, and Equifax). It is important to know that a single inquiry doesn’t have a major, lasting impact on your credit score, seeing as they drop off after a few months. If you’re looking for a personal loan with bad credit, you won’t have to worry about the application process having a long-lasting detrimental impact.
One way that a personal loan could negatively affect your credit score is if you take out a personal loan for credit card debt consolidation and then close out all your old credit cards. Some of those cards that you’ve had for a long time have helped you build your credit history, so you don’t want to quit them cold turkey. Another way you could end up hurting your credit score is by opening a new credit card at the maximum limit while you still have a personal loan you’re paying off.
Keep in mind that while on-time payments can help your credit score, late payments can do the opposite. A late payment typically makes it to your record when they’ve exceeded 30 days. If you don’t have those good habits in place, you’ll just be digging yourself into a deeper hole.
We recommend using a personal loan to improve your credit score if your score is currently low, as that’s where you’ll see the greatest impact. If your score is already good, don’t expect to see too much of a jump with on-time payments. As long as you’re maintaining a positive payment history, paying more than the minimum, and reaching a low balance (below 30%) ASAP, you can expect to see positive outcomes on your credit report.
Pro Tip: If you’re comparison shopping for personal loans to get the best terms, do all your applications in the span of a couple of weeks. That way, you can minimize the negative impact on your credit score if some of them do hard inquiries. Credit scoring models see this as rate shopping, and won’t ding your credit.
Is a Personal Loan a Smart Choice?
Unlike payday lenders, we want our borrowers to make the best choice for their situation. That’s why we provide educational material to interested parties–so they can weigh the pros and cons of different types of personal loans.
A personal loan is the best choice when:
- You’re looking for a loan that has some flexibility with payments, so you won’t get overwhelmed
- You want a fixed-rate loan that will allow you to easily plan out monthly expenses
- You want to improve your credit
It is not the best choice when:
- You have other assets to borrow against, such as a home equity line of credit (HELOC)
- You have a 401(k) you can borrow from (you’re paying yourself back in interest)
- BUT there are ramifications if you leave your company before the loan is paid off
- You have good credit and could qualify for a balance transfer credit card with 0% introductory APR
- BUT if you make a late payment before the introductory rate expires, you could have thousands in interest charges
If a traditional lender or bank won’t lend to you because of your credit score and you don’t want to go through a payday loan, a personal loan can be a great choice. We understand that you’re working toward a better credit score and may just need some cash to cover emergencies until your paycheck comes through. As long as you make regular payments (and take strides to pay back your loan early), a personal loan can help you improve your credit score and form healthy financial habits.
We encourage borrowers to pay back their loans prior to the end of their loan term (penalty-free) with our end-goal being that you get the biggest bang for your buck. Our collateral-free loans are based on so much more than just your credit, this way we can see the whole picture, and ensure you get a fair shot at a loan even without a high credit score. Complete a personal loan application from Helix today and see what your loan amount and rate would be. Get a decision on your personal installment loan application in minutes.