Will A Personal Loan Hurt Your Credit And Finances?

A personal loan is generally an unsecured loan you can get for any purpose. The lender might not even ask what you'll use the proceeds for, as borrowers can use them however they deem fit. However, you might wonder if a personal loan will harm your credit and finances. You'll need to understand several things to find the answer to this question. Keep reading to learn more.

How a personal loan works

First, you must understand the basic principles of personal loans. Most personal loans do not require collateral, making them unsecured loans. With these, the lender can't repossess something you own if you fail to make the payments. This feature is a benefit. Unfortunately, the downside is that you'll pay a higher interest rate on a personal loan than other loan types.

Personal loans fall into the installment loan category. This means you repay the money you borrow through a specified number of equal payments. You might get a one-year loan, requiring 12 payments. You can also get longer durations.

The effects on your credit

A personal loan can positively affect your credit if used properly. However, you might see a small decrease in your credit score right after the lender posts it to your credit file. The lender will also post the monthly payments you make after receiving them. Each time this occurs, it builds your credit repayment history. Therefore, getting a personal loan provides a way to build credit. To do this, you must make on-time payments every month.

The effects on your finances

You might also wonder how a personal loan affects your finances. The answer varies, depending on how you use the money. It can benefit your personal finances if you use the proceeds to pay off high-interest debt. For example, consolidating credit card balances is a smart way to use a personal loan. Your finances benefit from this decision. However, a personal loan requires payments. Therefore, your finances might suffer from having another payment each month. So think about this thoroughly before applying for a personal loan.

Evaluate your need for a personal loan

Borrowing money isn't necessarily bad. But evaluating your situation first is always important. Do you need the money? Will it benefit you? As you consider these things, you'll find the right answer. If you decide to get a personal loan for your situation, apply with a lender of your choice.