Millions of people find themselves in need of extra funds each year. As the cost of pretty much everything continues to soar, the number of loans being taken out is sure to follow suit. Though it’s not uncommon to face tight financial situations from time to time, taking out a loan without an actual need could work out in your favor as well.
Why Acquire a Loan If It’s Not Financially Necessary?
Some might scoff at the idea of securing a loan without an imminent need for extra cash. Though naysayers insist doing so would only be creating an extra expense, that’s not necessarily the case. In truth, several reasons exist for seeking out a loan proactively rather than reactively.
1) Establish Credit
Countless newcomers to the world of financing face a common conundrum each year. They need a loan to purchase a home or vehicle or pay for unexpected expenses. In order to be eligible to borrow money, they need an established line of credit.
To begin developing such a record, though, they’d need a loan, which they’re not eligible for because they haven’t yet established a borrowing history. Taking out a personal loan without such restrictive guidelines could help kickstart the process and circumvent this well-known hassle.
2) Eliminate Credit Cards
According to a 2018 news report, America’s credit card debt has hit an all-time high. This same writeup goes on to point out the average family with credit card debt pays out more than $1,000 each year in interest alone. For some, this figure is considerably higher.
Using a loan with a lower interest rate to pay off a credit card with a higher one could prove profitable in the long run. Even a fraction of a percentage could make a monumental difference in the amount of interest paid out over time.
3) Create Credit Diversity
Some lenders look well beyond credit scores and household income when determining loan eligibility. They factor types of credit into the equation as well. Variety is a plus in their eyes as long as it doesn’t exceed available credit limits. Taking out a personal loan could help generate the credit diversity those lenders expect to see when looking at borrowers’ overall pictures.
4) Improve Credit Score
Some reports say personal loans have little, if any, positive effect on a person’s credit score. This isn’t always the case. While certain loans don’t appear on credit reports, they can have a constructive impact nonetheless.
Using a loan to pay down an existing one may help reach the low balance levels creditors like to see. Personal loans could also help keep a person’s credit history from going stale so to speak. Either way, loans could go a long way toward transforming a poor credit score into a fair one or taking a good one to excellent status.
In Short
Financial hardships aren’t uncommon, and loans often help make tight situations a little less uncomfortable. At the same time, personal loans can be productive even if they’re not immediately necessary. From saving thousands of dollars in interest rates to combatting negative credit scores, they can serve as effective tools in the battle for borrowing power.
All that being said, using these tools responsibly is the key to success. Regardless of availability, loans shouldn’t be used frivolously or in excess. Keep moderation in mind and do your homework in advance of taking out a loan to be sure it’s the most suitable option.