Small Personal Loans - A Great Way to Build Credit [Personal Loans]
November 12, 2007, 11:23:51

It’s true: In today’s world, it takes credit to get credit. This can be frustrating for first-time borrowers. If you don’t have an established credit history, most lenders won’t want to take a chance on loaning you money or issuing a credit card to you. If a new borrower keeps getting denied, how can they expect to break into the credit cycle?

Small personal loans and purchases are good ways to build up your credit. Personal loans are a great option for borrowers who have no credit history, or those who want to rebuild damaged credit. These loans are easier to secure than a credit card. Their interest rates are generally lower, too.

Personal loans can be obtained through banks, credit unions, and other lending services. When borrowing for the first time, you can expect to be asked for proof of employment, as well as personal and professional references. The lender needs to know that you have had gainful employment for a reasonable amount of time (usually 6 months or more). If you’re rebuilding bad credit, it might be easier to get your foot in the door; however, you can expect higher interest rates.

Interest rates for personal loans will depend on your previous credit history, your savings and other assets, and whether the loan is secured. Borrowers can get secure loans by offering collateral that the lender can take possession of in the event of default. This minimizes the lender’s risk, which lowers the interest rate. Unsecured loans are also available for borrowers with poor or no credit, but the interest rates will be higher.

Once a personal loan is secured, the money should be spent on necessary purchases, or put away in a bank account where it can be used for monthly repayments. Lenders want to see that you can responsibly repay the loan over time – typically 6 months to a year. You must make your monthly payments on time. The importance of timely payments can’t be overstated when building or rebuilding credit. You can also make a good impression – and decrease the amount of money you spend on interest – by paying more than the minimum monthly requirement on your loan.

Once you have established your credit this way, you can start applying for secured credit cards, or credit cards available through a bank with which you’ve had a good financial relationship. These two types of cards are the easiest to obtain. A good credit history should reflect both “revolving” credit, such as credit cards, and the timely repayment of “installment” credit, such as small personal loans and lines of credit.

Good credit is very important. But if you have no credit or bruised credit, don’t count yourself out just yet. Lenders want your business, but they also need to know that they can expect repayment of the money they loan you. By taking out small personal loans and establishing a history of good repayments, you can improve your credit standing and open the door to new possibilities.

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