There’s no question about it – cash is king. If you are financially set up to do so, it’s almost always preferable to pay off any debts or invoices in full as soon as possible rather than letting any interest accumulate in your name. That said, taking out a personal loan for a large purchase can be a smart financial decision while interest rates are so incredibly low. This is especially true if you want to improve your credit rating.
Advantages of Loans
Loans have several advantages over credit cards for single large purchases that make them ideal for consideration when the market has such historically low interest rates. They typically have a fixed payment period and interest rate, allowing you to accurately calculate monthly costs and what the final cost of the loan will be, enabling you to make an informed decision on its affordability. This makes personal loans a good choice for when the purchase you want to make is going to take you a longer time to pay off.
For most people, a mortgage will be the single biggest loan they take out, although a mortgage is secured with real property rather than a contract and a personal credit rating. These two different types of loans are referred to as “secured” (mortgage, car loan) and “unsecured” (personal loan). With a secured loan, if you stop paying, the bank can repossess your house or your car and sell it to regain their lost capital. No such tangible property is backing an unsecured personal loan, so it’s a higher risk for the bank, which is why the interest rates of mortgages and car loans are lower than for other types of loans.
There is typically no penalty for paying off a personal loan early, and the repayment schedule is typically set up as a recurring payment every month for two to five years. So if you decide to take advantage of the market’s current favorable interest rates and take out a personal loan for one of your large purchases, set up a manageable repayment schedule for yourself and strive if at all possible to pay off the balance early. Personal loans give you more freedom and flexibility than credit card debt, and are a valid consideration for single large purchases in 2016.