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How to Use Personal Loans to Rebuild Credit

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If you have a fair or bad credit score, it could be for a variety of reasons — perhaps you’ve been the victim of credit fraud, made some late payments or recently graduated from school and need more time to build credit. No matter the cause or how low your score is, you can still repair your credit. One way is to use personal loans to rebuild credit. If you find yourself in this situation, here’s what you need to know about polishing your credit score.

Personal loans for fair credit

Should you find yourself with a fair credit score (580-669) and are looking for ways to improve your credit standing, here are several loan companies that work with fair-credit borrowers.

Lender APR Loan amount Loan term Minimum credit score Lender reviews
OneMain Financial 18.00% to 35.99% $1,500 to $20,000 24 to 60 months Not specified Read more
Happy Money (formerly Payoff) 7.99% to 29.99% $5,000 to $40,000 24 and 60 months 640 Read more
Prosper 6.99% to 35.99% $2,000 to $50,000 24 to 60 months 640 Read more
Upgrade 7.96% to 35.97% $1,000 to $50,000 24 to 84 months 620 Read more

Lenders were selected based on minimum APR using the LendingTree personal loan marketplace and using the following filters: (1) $5,000 loan amount; (2) fair credit; (3) loan purpose is debt consolidation; (4) and location of Charlotte, N.C.

Personal loans for bad credit

If you have poor credit (300-579), finding a lender that’s willing to give you a personal loan to improve your credit score can be a challenge. Here are a few lenders that offer personal loans for bad credit.

Lender APR Loan amount Loan term Minimum credit score Lender reviews
Avant 9.95% to 35.95% $2,000 to $35,000 12 to 60 months 600 Read more
LendingClub 8.30% to 36.00% $1,000 to $40,000 36 to 60 months Not specified Read more
LendingPoint 7.99% to 35.99% $2,000 to $36,500 24 to 72 months 580 Read more
Peerform 5.99% to 29.99% $4,000 to $25,000 36 or 60 months 600 Read more
Upgrade 7.96% to 35.97% $1,000 to $50,000 24 to 84 months 620 Read more
Upstart 6.50% to 35.99% $1,000 to $50,000 36 or 60 months 600 Read more

Lenders were selected based on minimum APR using the LendingTree personal loan marketplace and using the following filters: (1) $5,000 loan amount; (2) bad credit; (3) loan purpose is debt consolidation; (4) and location of Charlotte, N.C.

How a personal loan can improve your credit

According to Experian, the average credit score is 711, but the credit scores of millennials and younger generations are under 700. Your credit score will affect everything from what rates you get on a loan to whether you’ll get approved for an apartment, so establishing good credit is important.

Taking out personal loans to rebuild credit may sound counterintuitive, but it may work — if you handle it wisely. Credit scores are determined using five criteria, with each carrying a different weight: payment history (35%), credit utilization (30%), length of credit history (15%) and credit mix and new credit (10% each).

Here’s how a personal loan can boost your credit score:

  • Reduces your credit utilization ratio: If you take out a personal loan to consolidate your credit card debt, you can lower your credit card(s) utilization. You’ll use the personal loan to pay off your credit card balances, showing greater unused credit. Personal loans aren’t factored into credit utilization, since they’re installment loans with a fixed repayment plan.
  • Diversifies your credit mix: Having a mix of different types of credit, such as credit cards and loans, and handling them responsibly shows lenders that you’re able to juggle a variety of credit products.
  • Positive payment history gets reported to the credit bureaus: When you make consistent and timely payments on a personal loan, that activity is reported to the three major credit bureaus. You can view your score by viewing our free credit tracking options.

Know that once you decide on a lender and apply for a personal loan, the lender will perform a hard-credit inquiry of your credit to evaluate your creditworthiness, and this can knock down your credit score a few points temporarily. However, the long-term positive impact of successfully repaying a personal loan will most certainly outweigh any short-term ding to your score.

Do’s and don’ts: Using personal loans to rebuild credit

If you’re not careful, taking out a personal loan could actually worsen your debt problem and cause your score to drop. To keep that from happening, make sure you follow these five tips.

1. Do use a personal loan for the right reasons

When compared with higher-interest forms of debt, such as credit cards, personal loans can make a lot of sense. But that doesn’t mean you should take out a personal loan to finance extravagant purchases or rack up new charges on the credit cards you just paid off with the loan. Instead, use it as a means to an end.

For example, if you have credit card debt or other high-interest debts, taking out a personal loan to consolidate your debt is a good idea because you’ll save money. But using a personal loan to pay for a vacation will only add to your debt burden.

2. Don’t borrow more than you need

When you apply for a personal loan, you could be approved for as much as $50,000. But while it may be tempting to accept that amount so you have access to plenty of cash, doing so is a recipe for disaster.

Borrow the absolute minimum you need to meet your goals. Having a smaller loan will make the payments more manageable and increase your chances of being able to pay it off on time.

3. Do continue to use and pay off your credit cards in full each month

If you use a personal loan to pay off high-interest card debt, don’t just put those cards in a drawer and forget about them. To continue to build up your credit score, you need activity reported from both your cards and your loan. However, just put a small charge, like a Netflix subscription, on the cards each month and pay the balance off at the end of the month.

Establishing good credit habits could help you save money and become debt-free.

4. Don’t take out a loan without shopping around for your best deal

Don’t just apply for a loan with the first lender you see. Interest rates can vary widely from lender to lender, so it’s a good idea to shop around and compare offers from multiple personal loan lenders to make sure you get your best rates and repayment terms.

5. Do figure out how much you can afford to pay monthly

Before applying for a personal loan, make sure you can afford the monthly payments. Factor in the interest rate, loan amount and length of the loan using a personal loan calculator.

  • Create a budget: Make sure you understand what money you have coming in and going out each month.
  • Calculate your monthly payment: MagnifyMoney, which is owned by LendingTree, has a personal loan calculator to help you figure out your monthly costs. For example, a $10,000 loan at a 6% APR for three years will cost you $304 a month. You’ll pay $952 in interest — or $10,952 total. But if you need a lower monthly payment, you could consider the same $10,000 loan at the same APR over a five-year term. This would shrink your monthly payment by more than $100 to $193 a month, but you’d pay $11,600 over the life of the loan, $648 more than you’d pay if you went with the three-year term.

Explore credit-builder loans

With a credit-builder loan, you basically borrow from yourself. You apply for a loan and make payments toward it each month, but don’t actually get access to the funds until after the loan term is completed, when the full amount is issued to you. It’s safer than a traditional loan, and your on-time payments are reported to the credit bureaus.

Credit builder loans: Pros and cons
Pros Cons
  Easier for those with bad credit to qualify for than a personal loan as these types of loans often don’t require a credit check — lenders typically focus on your income for approval

  Can simultaneously help you improve your credit while helping you build good saving habits

  As you make on-time payments to your loan, your lender will report this to the credit bureaus which will increase your credit score

  Some lenders may charge you interest as well as administrative fees — be sure to compare lenders for the best rates and terms

  If you’re unable to make payments and end up defaulting on your loan, it could further hurt your credit score

  Unlike a personal loan, you’ll have to wait until you’ve paid off the loan in order to receive the funds — if you’re in need of some quick cash, this may not be the best option for you

Alternative ways to build credit

While a personal loan can be a great tool for building your credit, it’s not your only option. There are several other ways to establish good credit.

  • Apply for a secured credit card: Unlike traditional credit cards, secured credit cards require a security deposit that serves as your credit line. Perfect for those with bad credit or no credit, secured credit cards act like a credit card with training wheels, helping you establish good habits.
  • Get a peer-to-peer loan: If you have poor credit, qualifying for a loan can be difficult. One option to consider is applying for a peer-to-peer loan, where lending standards may be lower.
  • Apply for a car loan: If you plan on buying a car, the loan you take out to finance your purchase can help boost your credit, too. Like a personal loan, an auto loan diversifies your credit mix, and on-time payments are reported to the credit bureaus.

Don’t give up on your credit

If you’re trying to improve your credit score, taking out a personal loan can make a lot of sense, particularly if you have high-interest debt. Personal loans can help you consolidate your debt, save money and get out of debt faster, all while boosting your credit score.

But before submitting your loan application, make sure you have a repayment strategy in place to avoid racking up more debt. By establishing a plan of attack, you can tackle your debt and increase your credit.

If you have bad credit, don’t give up hope. There are personal loans for those with bad credit, which can help you improve your credit history.

 

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