- Dos and Don’ts of Taking Out a Personal Loan to Build Credit
- Do Find an Advantageous Interest Rate
- Don’t Apply with Multiple Lenders
- Do Consider on How Much You Can Afford to Pay Every Month
- Don’t Get a Loan from a Lender with No License
- Do Assess the Repayment Terms
- Don’t Withhold Information or Lie in Your Loan Application
- Do Make Timely Payments
- Don’t Ask Anyone to Become Your Cosigner
- Do Review the Loan Contract
- Takeaway – Personal Loan to Build Credit
Dos and Don’ts of Taking Out a Personal Loan to Build Credit
If you haven’t yet established a credit profile, it’s time to start it now. One of the main reasons you should build a good credit score is to qualify for a loan with a favorable repayment term and interest rate whenever you need it. Lenders will check your credit to determine how responsible you are when handling your finances and financial obligations.
Of course, there are more ways than one when building credit. For example, you can obtain a credit card and make payments on time. However, one of the drawbacks of credit cards is that they come with expensive interest rates and fees. So, instead of getting a credit card to establish credit, it’s smart to take out a personal loan.
A personal loan has a more favorable repayment term and interest rate. It won’t also be challenging for you to repay it because the principal and interest are divided into smaller portions, and there’s a fixed schedule on when you’re going to make payments.
However, there are “dos and don’ts” when taking out a personal loan to build your credit history. Read this guide to learn about them.
Do Find an Advantageous Interest Rate
For sure, there are many lenders that offer personal loans guaranteed instant approval. Some are great for you, while others are not. So, when shopping around for this loan type, make sure to compare lenders. Always pick the one with a more affordable interest rate that fits in with your monthly income.
The less you pay for the interest rate, the more chances you have of making timely payments. And, if you’re a responsible payer who pays on time, the better your credit score will be.
Don’t Apply with Multiple Lenders
Don’t try applying for multiple personal loans with different lenders simultaneously to increase your chances of obtaining one. Remember that each time you submit a loan application, it appears on your credit report, and it may drag down your credit score.
It will be much better to stick to a trusted lender that you believe will approve your loan application. In this way, you’re more likely to have good marks on your credit profile.
Do Consider on How Much You Can Afford to Pay Every Month
Better safe than be sorry. That’s the phrase you should keep in mind when applying for a loan. In other words, you should consider how much you can afford to pay each month before you send your loan application.
Since you’re just building your credit profile, you can go for a small loan amount so that you won’t find it difficult to repay what you owe.
Don’t Get a Loan from a Lender with No License
It’s a common practice now among borrowers to go online to borrow a sum of cash. While there are good lenders to be found on the internet, there are others whose only aim is to rip you off. Don’t fall too easily for “too good to be true” offers if they are not a well-established lending company.
Predatory lenders will suddenly call in debt, increase the fees and rates, or offer your debt up for sale to other creditors. If you want to work with a lender, make sure to read customer reviews about the lending company or ask the lender if it has a license to lend personal loans.
Do Assess the Repayment Terms
Aside from the annual percentage rate, it’s also crucial to weigh the repayment terms of the personal loan you want to take. It’s because some lenders impose origination fees or prepayment penalties. Such charges can cost you more than what’s needed.
You may also encounter lenders that demand payments every week instead of the standard monthly payments. Then, there are personal loan providers that allow you to choose whether to make payments weekly or monthly. Just look around for lenders that offer repayment terms that suit your financial situation.
Don’t Withhold Information or Lie in Your Loan Application
You’re committing a huge mistake if you withhold some details or give false information in your loan application. Lenders have their ways of assessing if you’re being honest or lying with them. When a lender finds out that you’re not telling the truth, chances are your loan application will get turned down.
Do Make Timely Payments
Since you’re taking out a personal loan to establish your credit history, it’s only appropriate to remind you to make payments on time. If you fail to pay according to the repayment schedule, this unbecoming behavior will reflect on your credit report.
Lenders will give you specific details about the repayment schedule and the loan term. As such, you know when to make payments. If there are unfortunate circumstances that you can’t pay the installment payment on schedule, you can tell your lender about it beforehand to lower your risk of getting a low credit score.
Don’t Ask Anyone to Become Your Cosigner
For those loan borrowers who have no established credit history, it’s common to ask a friend or family member to cosign a loan. Having a cosigner makes it easier for you to qualify for a loan, especially if your cosigner has an excellent credit score.
However, there are disadvantages when you ask someone to be your cosigner. For instance, some cosigners are not really willing to put their credit score or security on the line. They just do it because they can’t say no to you.
Also, there are lenders that will consider you a borrower who doesn’t have the means to pay the loan if you resort to having a cosigner. So, it’s better to apply for a personal loan without a cosigner. After all, you’re merely building your credit. As such, pick a small personal loan to make it easier for you to pay it.
Do Review the Loan Contract
You must read the loan contract carefully before you sign it. Check if there are stipulations that are not in your favor. Reviewing the agreement between your and the lender is crucial to avoid any problems or regrets later.
Takeaway – Personal Loan to Build Credit
Yes, taking out a personal loan can be a good way to establish your credit history. However, there are things you need to consider when getting this type of credit-builder loan. You can go back to this guide if you have any clarifications regarding this matter.