Three Reasons to Start Small With Personal Loans

[Jun 5, 2009.]

 

Unsecured personal loans serve a vital interest in the American economy for many consumers, offering affordable loans even to borrowers with subpar credit. However, new borrowers are well-advised to start out small with personal loans, rather than loading up right off the bat.

Here are three reasons why starting small makes sense when it comes to unsecured personal loans:

1. Starting Small May Be the Only Option

Choices are simpler when there's only one of them. This is often the case with borrowers who have subpar credit and are seeking unsecured personal loans. Remember: an unsecured personal loan is a risky decision for a lender, so expect that risk to be priced into the loan's interest rate.

Moreover, expect the lender to be wary of lending a large amount. Many lenders cap out unsecured personal loans at $1,500 or $2,000. Beyond the protection afforded the lender, these limits help borrowers not get in over their head.

2. Small Personal Loans Can Be Paid Back More Quickly

An unsecured personal loan ideally should not be a part of a consumer's monthly expenses. Rather, the ideal use of an unsecured personal loan is to take it out, use it properly, and then pay it back quickly.

This cuts down on interest paid, and may even help to build credit for borrowers who pay more than the monthly minimum. Taking out too much of a loan, by contrast, can take a borrower the other way.

3. Each Personal Loan Repaid an Accomplishment Visible to Future Creditors

As hinted at above, borrowers with subpar credit can make especially great use of small bad credit personal loans as a means to build credit. Because a personal loan is unsecured, the lender cannot take a borrower's car or house to repay a defaulted loan. This puts the onus for repayment squarely on the borrower.

When that borrower comes through on those small personal loans, paying on time and in full, evidence builds that a borrower is creditworthy. For exactly this reason, personal loan borrowers should monitor their credit report to make sure that their good repayment history of unsecured personal loans is noted there.

That history is the kind of history that may enable a borrower to qualify for a large loan someday sooner rather than later. A mortgage, for instance.

Meanwhile, borrowers with a strong repayment history of small personal loans may begin to see lower interest rates on personal loans as perceived lender risk declines.

 

About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.