Is it possible that getting a loan will help you save money? Does that not sound counter-intuitive to you? Borrowing money, however, can end up saving you money in the long term if you apply the appropriate method. How to do it:
Eliminating high-interest debt equates to long-term savings.
Credit card fees are costly. The average interest rate on credit cards is 16.03 percent. Each month, you pay $16.03 in interest on every $100 you spend. Some credit cards have interest rates of 23.99% or more.
Personal loans, on the other hand, may have interest rates as low as 5%.
If you have credit cards with high interest rates, you can save money by taking out a personal loan to pay off those cards. The larger the savings, the better your credit score. But even if you have mediocre credit, this strategy will likely save you money.
The credit card debt is going to be paid off using the money from the personal loan. As a result, you will have a single bill to pay and, in most cases, a lower interest rate. Because of the reduced rate, cost savings are anticipated.
- A loan of $1,000 at 16 percent interest over five years would cost $1,488 in total.
- A loan of $1,000 at 5% interest over 5 years would cost you $1,140.
The personal loan would result in a savings of $348. That’s $348 you could use for anything else, such as having fun.
Try this calculator to determine how much you can save on credit card debt.
A personal loan can be used to pay off any type of debt:
- Student loans
- Credit cards
- Automobile loans
- Additional personal loans
For this strategy to be truly cost-effective, however, the personal loan’s interest rate must be lower than that of your credit card, auto loan, etc.
Who Would This Be Useful For?
It is up to you to decide if this strategy is appropriate for you, although it may work for those who:
- Has a substantial amount of high-interest credit card debt.
- Has average or worse credit.
- Desires a single payment as opposed to several instalments.
Improving Your Credit Score = Better Future Interest Rates
By boosting your credit, a personal loan might also help you save money. A higher credit score will save you money over the long term by allowing you to qualify for reduced interest rates on loans for things like credit cards, mortgages, and vehicles.
If you are just starting to build your credit history or want to increase your credit score, obtaining a loan may be able to assist you in accomplishing your goal. The payoff will more than make up for the danger if you can practice self-discipline.
The concept is as follows:
- You obtain a personal loan.
- You repay the loan over the course of two years.
- Your credit score rises.
- You also gain instant savings (loan funds).
You will be expected to make monthly loan payments if you want to proceed with this strategy. This will help you develop discipline, and it should also result in an increase in your credit score.
Sure, you’re paying more in interest, but it may be a minor price to pay if you can improve your credit score and obtain a loan with a reasonable interest rate.
Who Would This Be Useful For?
- A person who seeks to establish or improve credit.
- A person who can afford to make loan payments.
- A person who wants to prepare for purchasing a home or car.