Even though your utilization ratio is 100% for your loan, your other credit cards are at 0% -- so your overall ratio goes down.
Just by increasing your available credit, you can improve your credit utilization ratio and credit score. And as you pay the loan down, things will only get better.
3. To make home improvements
How it works: Some home improvement projects like wood floors and a new HVAC system can increase the value of your home. Even if you don't plan to sell your property anytime soon, a personal loan for home renovations can allow you to make your house more valuable.
4. To build credit history
How it works: For people who have bad credit or are just starting to build their credit, consistently making payments on a personal loan is an easy way to build a positive credit history and plump up your credit score. Building toward an excellent credit score is a worthy goal. Having excellent credit means easier loan approval when you need a new loan and the ability to avoid high interest rates or predatory lenders.
5. To establish credit in your own name
How it works: When you're newly single, a personal loan can be a win/win situation. A personal loan can fund a dream project (like creating a spa-like master bath or garden of your dreams) and help you establish your own credit. Some personal loan lenders offer low loan amounts, which is a good thing if the primary reason you want an installment loan is to make a regular monthly payment and build excellent credit on your own.
Three times getting a personal loan is a bad idea
Like all financial products, personal loans can be a powerful tool. They can also be, on occasion, a bad idea. Here are three times when a personal loan is not your best option.
1. When it cuts your budget too close for comfort
Try this instead: Wait until your financial picture has time to improve.
If your budget is already tight, think twice about taking out a personal loan, even if you have already filled out a loan application and received loan approval. Unless a personal loan allows you to rid yourself of existing debt with a higher interest rate, a new loan might just add to your financial burden. If possible, find another way to get the cash you need. This may include borrowing from family or friends or selling things around the house you no longer use.
2. When you don't have an emergency fund in place
Try this instead: Unless the loan is intended to cover an emergency, focus on building an emergency fund.
One of the most predictable things about life is how unpredictable it can be. That's why it helps to have an emergency fund with three to six months' worth of income. That way, you're able to cover large and unexpected expenses like car repairs or medical bills. So if the reason you're considering a personal loan can be delayed, consider doing so until you have an emergency fund in place.
3. When your credit score is not up to snuff
Try this instead: Take steps to improve your credit score until you can qualify for a personal loan with a low interest rate.
While there are credible lenders that offer bad credit personal loans, the interest rate is higher than you would pay if you had a strong credit score. You may also be required to pay more in fees. More importantly, taking on a new debt when your credit score needs boosting may add unnecessary stress to your life.
Still, life happens and you may not have much choice if you find yourself in an emergency situation. Ideally -- even if you do pay more for this loan -- making each monthly loan payment on time will help increase your credit score.
The benefits of a personal loan far outweigh the drawbacks, particularly if you have an excellent credit score and a plan for using the funds in a way that improves your financial outlook. It helps to think of a personal loan as a financial tool and to pull it out of the toolbox when you have a specific job for it to accomplish.
