Loans have been a financial cushion for many people hit with unexpected expenses. Whether it’s a sudden home repair, medical bill, or high moving cost, many specifically turn to personal loans to get the money they need without incurring high interest.
While it does help you take care of emergency expenses, a personal loan can also help you save money. It’s most likely surprising for you since loans are equivalent to liabilities. Below, we’ve highlighted how you can save money with a personal loan.
Understanding Personal Loans
Personal loans are one type of installment loan. It means that you obtain a lump sum of funding and must repay it with interest every month over a certain period. Typically, the length of personal loans ranges from 12 to 84 months. But unlike other installment loans, you can use it for a variety of purposes.
There are two types of personal loans — secured and unsecured. A secured personal loan will require you to provide collateral, and the lender has the right to repossess it if you default on the loan. On the other hand, an unsecured personal loan doesn’t require collateral to borrow money.
To get a personal loan, you would have to apply to a lender, such as a bank, credit union, or online lender. The lender will review your application and look at several factors to decide whether or not they will approve you. Note that fees, interest rates, and loan amounts may vary from each lender. Make sure to compare each option to get the best personal loan.
Saving Money With A Personal Loan
Once you understand how personal loans work, you can now learn how to save money through them. Loans are liabilities, but with proper financial management, you can use them to build up savings.
Here are some ways to spend your personal loan to your advantage and save money in the long run.
If you have multiple debts with higher interest rates, a personal loan would be an excellent option to pay them off and save money at the same time. You can easily find a personal loan with lower interest rates than your debts. Instead of paying different kinds of loans with different due dates, it would be more sensible to consolidate them into one personal loan. For more information, you can visit https://www.creditninja.com/ and they will answer you regarding that matter.
But make sure to have a shorter loan repayment period, like five years. Doing so won’t only save you interest costs but, more importantly, instill financial discipline to get out of debts faster. When you’re done paying your loans, you have more money left for savings or emergency funds.
Finance A One-Time Big Purchase
You may find yourself in need of cash for a big purchase, such as medical expenses, vacations, or consumer goods. In these cases, it would make sense to take out a personal loan. The rates of personal loans are economical, with affordable monthly installments over time.
Although a personal loan is costlier than using your savings, it is often better than spending your savings on high-value expenditures in a single shot. Your savings may be used for investments, which are likely to give you higher returns than the interest you pay on a loan.
Improve Credit Score
Defaulting on any loan can impact your credit score. Note that lenders will perceive you as a higher risk if you have bad credit. As a result, you may not be able to get a loan with low interest.
But taking a personal loan can help lower your credit utilization and, in turn, improve your credit score. With a good credit score, you can enjoy certain benefits. For one, you can negotiate a lower interest rate on your loan. You may also qualify to receive a waiver on some processing charges.
Invest In Business
You can choose to use a personal loan to make an investment that will generate an income. Do you want to start a blog shop or sell products online? If you already have a business, you can take out a personal loan to purchase equipment to create a new stream of revenue.
Whatever it is, you can use the income you generate from the investment to pay your loan but with additional and higher returns. Don’t hesitate to take out a personal loan to boost your savings or invest in something that will bring profit.
Claim Tax Deductions
Personal loans can be a tool to claim the benefits of tax deductions. If you use a personal loan to renovate your house or make a down payment for it, you can subtract it from your taxes. Even the business expenses you use from a personal loan can also be deducted from your taxable income.
Taking out loans of any kind has potential benefits and drawbacks. These pros and cons often depend on how you will use the loan. In the case of personal loans, you have more options to reap the benefits, like saving money, since they can be used for various purposes. As long as you have the resources to repay the loan and the discipline to manage it, a personal loan can help improve your finances.