In recent years, personal loan applications have been on the rise. Personal loan applications are mobile applications that enable applying for a loan from a smartphone. It simplifies the lending process by cutting the borrowing, approval, and disbursement time.
The application helps one to borrow finance instantly, which helps in building a credit line. In this article, we will be looking at how personal loan apps work, what the interest rate on personal loan is, and how they help in improving credit scores.
Features of Personal Loan App
The following are several features listed of an efficient personal loan app.
- Easy application process
- Quick approval decisions
- Flexible loan amounts
- Various repayment terms
- Digital documentation
Understanding Credit Scores
A credit score is defined as simply your ability to repay a debt, loan, or any other financial obligation. It helps the creditor in deciding whether or not to grant a loan to the borrower based on his or her past financial transactions.
In India, the credit score ranges between 300 to 900. The higher the score, the better the creditworthiness of that individual.
Factors that influence your credit score include:
- The history of payments made
- The amount of credit extended
- The amount and period since the credit
- Particular types of accounts for credit
How Do Personal Loan Apps Help Build Credit?
Let us now examine how the use of a personal loan app may help in increasing your credit score.
Building Credit History
If you are a new borrower or have a minimal credit history, a personal loan through an app can make it easier to build a credit profile. After making regular repayments, this gets reported to credit bureaus, which helps in building one’s credibility as a borrower.
Proving Repayment Capability
Making timely repayments of loans through a personal loan app helps to represent you as a credible borrower. This is primarily because a person’s payment history has a great impact on the person’s credit score, and hence this helps in the long run.
Diversifying Your Credit Mix
A mix of credit facilities (credit cards, personal loans, mortgages, etc.) improves a borrower’s credit score. Therefore, taking a personal loan via an app may improve your score if you apply it properly.
Debt Consolidation
Some individuals obtain personal loans to eliminate debts with usually high interest, for instance, credit card debts. This may help in increasing one’s score due to the app’s feature to restructure the debt.
Factors to Consider When Choosing a Personal Loan App
While personal loan apps may help build your credit score, it’s important to consider the following:.
Interest Rates
Personal loan apps often offer competitive interest rates, however, these can vary widely. Be sure to compare rates from multiple lenders to find the best deal. Remember, a lower interest rate means you’ll pay less over the tenure of the loan.
Fees Structure
Some apps may charge origination fees, processing fees, or prepayment penalties. Read the terms and conditions carefully to understand all costs associated with the loan.
Repayment Terms
Choose a repayment term that fits your budget. Borrowers prefer to repay loans over longer terms since this would incur lower monthly payments. However, this comes at the expense of paying a higher amount of interest throughout the loan’s tenure.
Credit Reporting
Ensure the personal loan app reports to major credit bureaus. This is crucial for the loan to have a positive impact on your credit score.
Tips for Using Personal Loan Apps Responsibly
To maximize the potential credit-building benefits of personal loan apps:
- Borrow only what you can afford to repay
- Make all payments on time
- Establish automatic payments to prevent missing the due payment dates
- Monitor your credit report regularly for errors
- Use the loan for its intended purpose
- Avoid taking multiple loans simultaneously
Potential Risks of Personal Loan Apps
While personal loan apps can be helpful, they also come with risks.
- High interest rates for borrowers with poor credit
- Potential for overborrowing
- The effect of credit inquiries on your credit score
- The possibility of getting trapped in a debt cycle if loan facilities are used irresponsibly
Conclusion
Personal loan app, including those offering travel loans, can be useful for building credit when used responsibly. They offer convenience and may help improve your credit score through consistent, on-time payments and credit mix diversification.
However, it’s crucial to consider the interest rates, terms, and conditions, along with your ability to repay, before taking a loan. Remember, building a better credit score takes time and responsible financial behavior.
While personal loan apps can be part of your credit-building strategy, they should be used carefully as part of a broader financial plan.