Can a Personal Loan Help Rebuild Credit?

[Mar 26, 2010.]

 

People get personal loans for a variety of reasons. One of the more popular uses for a loan is to consolidate debt. Getting a personal loan shouldn't be your first choice for paying off debt, but it could help repair credit in some cases. Keep the following points in mind so your loan is a blessing and not a curse.

Personal Loan Rates

Having so-so credit won't necessarily keep you from getting a personal loan. But the lower your credit score the higher the interest rate you can expect to pay to borrow money. Lending conditions are tough these days, so having bad credit may result in your being completely turned down for a personal loan through a bank. If this happens, consider shopping for a loan from a credit union or social lending Web site.

Do not apply for a loan if you don't have enough income to keep up with the monthly payments. Getting behind on payments can quickly end plans to repair credit. Be honest when looking at your finances. In addition to the loan payment you must continue to pay for housing, food, insurance, utilities, etc.

Debt Loans Can Cut Monthly Payments

Once you've determined that you have enough income to make the payments on a debt consolidation loan, shop around to compare rates. Debt loans should help lower overall interest paid on principal balances. If you are approved for a loan it shouldn't be too difficult to lower the interest payments if you currently have credit cards with rates of 20% and up.

Pay More Than the Minimum Owed

Even if you use a debt loan to lower interest and overall monthly payments, try to pay more than the minimum each month. For instance, if you have $6,000 in credit card balances and take out a personal loan with a 9% interest rate to pay them off, you would need to make monthly payments of at least $524.71 to pay it off in 12 months. Use a debt calculator to determine how long it would take to pay off credit cards if you continue making minimum payments.

Review Credit Report

If the goal is to repair credit, get a copy of your credit report. Correct any mistakes or out-of-date information that may be contributing to a low score. Once you pay off your credit card balances with a debt loan, check to see if those accounts are reported properly. Close out credit lines that may tempt you to spend again, and make sure your credit report notes that they were closed at your request.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.