How to Use Personal Loans to Rebuild Credit |

If your credit score has taken a beating due to poor money management or the loss of your job, you can use personal loans to rebuild your credit. You can opt for using a secured loan against your own valuable property, or you can use an unsecured loan, which offers greater risk to the lender. Either way, a personal loan–if used wisely–can be a powerful tool to improve your credit score and show a responsible payment history. Here are the basics you need to know:

Using a Secured Loan to Rebuild Credit

You can use a secured line of credit to rebuild your credit history. This is generally done by using a home equity loan to consolidate debts. Basically, you are putting your home up as collateral on the loan, which offers a greater risk to you as the borrower. On the other hand, it’s an almost guaranteed way to get a loan, as it offers such a low risk to the lender. You can then use this credit to pay off high-interest debt, such as your credit cards, or unsecured debt such as medical bills.

Using an Unsecured Loan to Rebuild Credit

You can also obtain a high-risk unsecured loan to rebuild your credit. In this case, you apply for an unsecured personal loan with the lender, usually in a much smaller amount and with longer payment options than a secured loan to mitigate the risk to the lender. These loans are harder to obtain, since you are not offering collateral on the value of the loan, which makes it a much higher risk to the lender. On the other hand, by borrowing a small amount for a longer period of time, the lender is more assured that you can make the monthly payments.

Tips and Tricks of the Trade

No matter how you choose to borrow, the key to rebuilding your credit is to make your payments on time, every time. In fact, if you opt for unsecured personal loans and can work your budget so you don’t really need the money, you can place funds in a separate bank account, far removed from your own personal checking. Then you can simply use the money to pay off the loan, building your credit without the risk of blowing the money on personal wants. In fact, if you explain that this is how you intend to use the loan, obtaining an unsecured line of credit may be much easier. Once you pay off personal loans, make sure your excellent payment record shows up on your credit report–often lenders “forget” to record the good payments and only ding your credit report when you are late. This is one the best ways you can rebuild your credit–and all it takes is a little discipline on your part!