26:["$","$L27",null,{"category":"$28","relatedArticles":[{"id":"cG9zdDozNjgyOA==","databaseId":36828,"postId":36828,"author":{"node":{"id":"dXNlcjoyOA==","databaseId":28,"userId":28,"avatar":{"url":"https://secure.gravatar.com/avatar/c2129e3c852ac8063af4562fe9605e22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Rebecca","fullName":"Rebecca Lake, CEPF®","lastName":"Lake, CEPF®","name":"Rebecca Lake, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":1224,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"rlake","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo1NDM3","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":5437,"categoryId":5437,"link":"https://smartasset.com/personal-loans/articles","name":"Personal Loans","postCount":{"pageInfo":{"offsetPagination":{"total":25,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"personal-loans","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$29","date":"2015-09-01T10:00:29","excerpt":"

\n","featuredImage":{"id":"cG9zdDoxODM4MjI=","databaseId":183822,"altText":"Dos and Don'ts of Using a Personal Loan to Build Credit","date":"2023-01-20T02:04:09","fileSize":79524,"mimeType":"image/jpeg","modified":"2023-01-20T02:04:09","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2015/09/iStock_000048081342_Small.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-5-9","readable":"May 9, 2023"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/personal-loans/dos-and-donts-of-using-a-personal-loan-to-build-credit","metaDesc":"Getting a personal loan can be a great way to boost your credit score. But certain mistakes can hurt it. Here are the things to do and to avoid.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"Dos and Don'ts of Using a Personal Loan to Build Credit - SmartAsset","__typename":"PostTypeSEO"},"slug":"dos-and-donts-of-using-a-personal-loan-to-build-credit","status":"publish","title":"Dos and Don’ts of Using a Personal Loan to Build Credit","uri":"/personal-loans/dos-and-donts-of-using-a-personal-loan-to-build-credit","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoyOA==","databaseId":28,"userId":28,"avatar":"$2a","description":"Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.","additionalMeta":"$2b","email":null,"firstName":"Rebecca","fullName":"Rebecca Lake, CEPF®","lastName":"Lake, CEPF®","name":"Rebecca Lake, CEPF®","postCount":"$2c","slug":"rebecca-lake-cepf","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybTo1NDM3","children":"$2f","databaseId":5437,"categoryId":5437,"link":"https://smartasset.com/personal-loans/articles","name":"Personal Loans","postCount":25,"slug":"personal-loans","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Building credit involves taking on some form of debt so you can pay it off and there’s more than one way to do it. Credit cards, for example, offer flexibility and convenience but they tend to come with high-interest rates. Taking out a small personal loan, on the other hand, could be better. Following some simple rules can ensure that you help rather than hurt your credit score. If you’re considering taking out loans then you may want to work with a financial advisor to make sure you have a full financial plan in place first.

","

What to Make Sure You Do When Building Credit

","

When building your credit by taking out a personal loan you’ll want to make sure that you take certain actions to make sure your efforts are effective. First, you’ll want a financial plan and you’ll need to understand what credit score you’re aiming for. This can help you determine what type of account you need to open or how much money to borrow. Here are some of the other most important things to make sure you do.

","

Do Shop Around for the Best Rate

","

When you’re in the market for a personal loan, you don’t want to jump on the first offer that comes along. Even if the loan terms look appealing, you owe it to yourself (and your wallet) to see what different lenders are offering in terms of interest rates and fees. The lower these costs are, the more money you’re going to save in the long run.

","

Do Review the Terms of the Loan Agreement

","

Once your personal loan gets the green light, you’ll need to finalize the deal by signing off on the paperwork. This is not a step you want to rush through. It’s a good idea to carefully read over your loan agreement before signing on the dotted line. One thing to pay attention to is whether there are any penalty clauses, which could cause your interest rate to increase or alter another loan term.

","

Do Make Your Payments on Time

","

The factor that has the biggest effect on your credit score is your payment history. Even one late payment can be devastating. When you take out a personal loan, your lender will provide you with a detailed payment schedule and it’s critical that you stick to it.

","

If you think you’re going to be late at any time, it’s best to let your lender know immediately to minimize any potential damage to your score. While it will likely damage your credit either way, there is at least a chance it isn’t reported if the lender knows of your intention to pay and what is going on with your account. You never get that benefit if you neglect to communicate.

","

What Not to Do When Building Credit

","

","

When you’re building your credit it’s important to have a plan to follow. It can be very easy to fall off the wagon or to take an action that could end up hurting your credit if you’re not careful. Even well-intended activities can damage your overall goal. Here are some of the mot important things not to do when using a personal loan to grow your credit.

","

Don’t Go Overboard Applying for Loans

","

Thinking that you can up the odds of getting approved by applying with multiple lenders at the same time could be a serious mistake. Any time you apply for a loan, it shows up on your credit report as a hard inquiry and can cause your credit score to dip. Sticking with just one lender that you’re confident will approve your application can minimize the impact on your score. Be as selective as you can when it comes to choosing the what type of loan you’re applying for.

","

Don’t Borrow More Money Than You Need

","

Just because you’re approved for a $5,000 personal loan doesn’t mean you need to accept that much money. If you don’t need the loan for any other purpose than building your credit, you could be better off borrowing a smaller amount instead. That way, you still get the benefit of establishing a payment history without having a huge debt burden hanging over your head.

","

Don’t Run up Other Kinds of Debt

","

As you make payments on a personal loan you may see your credit score begin to improve. A better score can make you eligible for other types of credit. While it may be tempting to borrow even more, you could be putting your score in danger. Having multiple lines of credit that are close to their limits increases your credit utilization ratio. A higher debt-to-credit ratio can knock points off your score.

","

The Bottom Line

","

","

Getting a personal loan can be an effective way to improve your credit if you’re using it wisely. Making payments on time and holding off on multiple applications for credit can help boost your score. You shouldn’t borrow more than you can afford, though, and you’ll want to make sure you have stable income and money put away in the event of an emergency so that you don’t default as that could really damage your overall credit.

","

Tips for Building Credit

","$31","

Photo credit: ©iStock.com/Yuri_Arcurs, ©iStock.com/PeopleImages, ©iStock.com/Matt_Brown

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The Rule of 78 can be used by lenders to calculate interest that could significantly impact how much you end up paying over the life of a loan. Unlike the standard amortization method, the Rule of 78 front-loads interest payments, meaning borrowers pay more interest in the early months of the loan term. This can […]

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His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":762,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1269,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"factCheckedBy":null,"secondEditor":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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","

If you’re considering a loan, a financial advisor can help you compare borrowing options, repayment strategies and minimize interest costs based on your finances.

","

What Is the Rule of 78?

","

The Rule of 78 is a method used to calculate interest on certain types of loans, particularly those with fixed terms, such as auto loans or personal loans. The method is also known as the sum-of-the-digits method.

","

Notably, this approach front-loads interest payments, meaning borrowers pay more interest in the early stages of the loan term. This can be beneficial for lenders, as they receive a larger portion of the interest upfront, but it may not be as advantageous for borrowers who plan to pay off loans early.

","

The name comes from the sum of the digits of the months in a year, as in 1+2+3+4+5+6+7+8+9+10+11+12=78. The resulting sum is used to allocate interest payments over the loan’s term.

","

To do this, each month’s interest is calculated by dividing the number of remaining months by 78. For example, in the first month of a 12-month loan, 12/78 of the total interest is due, while in the last month, only 1/78 is due. Notice that this results in higher interest payments at the beginning of the loan term.

","

For example, a $10,000 loan with a 12% annual interest rate over a one-year term would cost $1,200 in interest. Under the Rule of 78, the first month you would pay 12/78 of the total interest or about $184.62. The last payment would only have 1/78 of the total interest, or about $15.38. If you pay off the loan after six months, you have paid about 57.7% of the total interest, or $692.40, instead of the 50%, or $600, you might expect with simple interest.

","

For borrowers, the Rule of 78 can have significant financial implications, especially if they intend to pay off their loan early. Since more interest is paid at the beginning of the loan, early repayment does not result in as much interest savings as it would with a simple interest loan.

","

In some regions, the use of the Rule of 78 has been restricted or banned for certain types of loans due to its potential to disadvantage borrowers. For example, in the United States, the Rule of 78 cannot be used for loans longer than 61 months. This regulation aims to protect consumers from paying disproportionately high interest if they decide to pay off their loans early.

","

How the Rule of 78 Is Calculated

","

","

The Rule of 78 is particularly used on loans with precomputed interest. This method is often applied to short-term loans, such as auto loans, where the borrower pays a fixed monthly amount.

","

For example, in a 12-month loan, each month’s interest is weighted differently. The first month’s interest is weighted by 12, the second by 11, and so on, until the last month, which is weighted by 1.

","

This means that the borrower pays a larger portion of the total interest in the initial months. The method benefits lenders if a borrower pays off the loan early, as more interest has already been paid.

","

Rule of 78 vs. Simple Interest

","

Simple interest is calculated on the principal amount of a loan or deposit. Unlike the Rule of 78, simple interest does not change over the life of the loan. Borrowers pay interest only on the original principal, making it easier to predict and manage payments.

","

When comparing the Rule of 78 with simple interest, the primary difference lies in how interest is allocated over the loan term. The Rule of 78 results in higher interest payments at the beginning, which can be a disadvantage for borrowers who refinance or pay off their loans early.

","

Simple interest, on the other hand, offers a more balanced approach, with interest payments spread evenly throughout the loan term. This can lead to significant savings for borrowers who do not carry the loan to full term.

","

The choice between the Rule of 78 and simple interest can have a large impact on the total cost of a loan. Borrowers who anticipate the possibility of early repayment should be particularly cautious with loans calculated using the Rule of 78. Simple interest loans can be more cost-effective in such scenarios.

","

Bottom Line

","

","

The Rule of 78 is important to understand if you’re considering a loan with precomputed interest. This method, often used in short-term loans, front-loads interest, so you pay more in the early stages. If you plan to repay the loan early, it can be disadvantageous, as you won’t save as much on interest when compared to loans with simple interest calculations. While it benefits lenders, it generally works against borrowers who expect to pay off their loans early.

","

Financial Planning Tips

","$3f","

Photo credit: ©iStock.com/RgStudio, ©iStock.com/MixMedia, ©iStock.com/

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If you need cash to bankroll a large purchase, you can’t wait to save up for it and you’re not interested in paying credit card interest, a visit to your bank or credit union can be an alternative. Personal loans tend to offer lower rates compared to credit cards and the repayment terms are fixed, which means you won’t have to worry about the debt lingering. When you’re applying for a personal loan, there are some things to watch out for that could make it more expensive.

","

1. Overlooking Origination Fees

","

Any time you apply for a loan, whether it’s to buy a home or consolidate debt, the financial institution extending is likely to charge you an origination fee to process your application. Origination fees are calculated based on a percentage of the amount you’re borrowing. Depending on the lender, it can be as low as 0.5 percent or as high as 2 percent for mortgage loans.

","

","

The origination fee doesn’t always have to be paid upfront. It can be rolled into the final loan total. For example, if you’re borrowing $5,000 with a 2 percent origination fee, the actual amount of the loan could come to $5,100 with the fee. So why is this so important?

","

The answer is simple – the more you borrow, the more money you’re paying interest on in the long run. A $5,000 loan with a 6 percent interest rate and a five-year payoff could cost you nearly $800 in interest. When you throw in another $100 for the origination fee, it could increase the interest paid by nearly $20. It may not seem like much, but it can add up if you’re borrowing larger amounts or paying a higher percentage for the fee.

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2. Not Asking How the Interest Is Calculated

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Aside from shopping around with different lenders to find the best interest rate, it’s a good idea for borrowers to be conscious of how the interest is calculated on their loans. Banks and credit unions can use a few different ways to determine how much a personal loan is going to cost.

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With the simple interest method, the interest amount increases based on the amount you borrow, the interest rate and the length of the loan. If you borrowed $1,000 at a rate of 5 percent with a loan term of one year, you’d pay $50 in interest. If the term is extended to two years, the interest would double to $100.

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When interest is compounded, it continues to accrue on top of the existing interest as you pay down your balance. Compound interest can be calculated on a daily or a monthly basis but you can shave off a few bucks if you make additional principal payments each month or pay ahead of the due date.

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If your loan interest is pre-computed, it’s already built into your monthly payment amount. Every time you pay something toward the balance, a specific portion of it goes to the principal and the rest goes to cover the interest and finance charges. If you’re planning to pre-pay on the loan or knock it out early, you don’t stand to save as much on interest if it’s computed beforehand.

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3. Not Checking for Penalties

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Although it’s not usually associated with personal loans, some lenders may include a prepayment penalty clause in your contract. Basically, that means you’ll have to hand over more cash to the bank if you decide to wipe out the loan ahead of schedule. Also called an exit fee, the prepayment penalty is designed to make up for the interest the bank is losing out on. Before you sign on the dotted line, it’s probably best to review your loan contract carefully to check for any hidden fees like this that could end up costing you money.

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If you want more help with this decision and others relating to your financial health, you might want to consider hiring a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with top financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

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Photo credit: ©iStock.com/IPGGutenbergUKLtd, ©iStock.com/Zerbor, ©iStock.com/LUHUANFENG

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A securities based loan, or margin loan, is line of credit secured by assets in your investment portfolio. These loans typically come with a relatively low interest rate, and can be processed and issued fairly quickly. However, by using your portfolio as collateral, these loans also depend on the value of your underlying assets. And […]

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However, by using your portfolio as collateral, these loans also depend on the value of your underlying assets. And if the market dips too far, your lender can call in the loan or force a sale on your investments. This makes SBLs riskier than other types of loans, though they can be successfully used to solve short-term liquidity needs.

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Talk to a financial advisor to discuss the pros and cons of a securities based loan in your situation.

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What Are Securities Based Loans?

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A securities based loan, or SBL, is a form of secured lending that uses your investments as collateral. Lenders allow you to use most mainstream assets for a securities-based loan, including stocks, bonds, and shares in a mutual fund or ETF.

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Typically, lenders structure a securities based loan as a line of credit. This means that instead of extending the loan in one, lump-sum transaction, like a personal loan or a mortgage, the lender allows you to borrow at any time and in any amount up to a limit of your portfolio value. As you repay past borrowing, this frees up room for new borrowing under the cap.

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This type of loan can be extended by any lending institution, and will typically be handled by banks or brokerages.

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The idea behind a securities based loan is to help you access your portfolio’s value without having to sell its underlying assets. For example, say that you have $10,000 in stocks. You would like to use some of that money, but you also believe those shares will continue to gain value. A securities based loan gets you cash based on those stocks without having to sell them.

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However, many securities based loans have terms which necessitate an immediate payback of some of the loan if your portfolio value drops below a certain value.

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How Do Securities Based Loans Work?

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When you take an SBL, you will nominate the assets that you want to use as collateral for this loan. For example, you might stake a $5,000 bond portfolio or $10,000 in stock shares. Your lender will then offer a loan based on the nature of the underlying assets and the amount in the portfolio. In some cases a lender will also check your personal credit score, although this is less common.

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Securities based loans typically range between 50% and 90% of the value of the underlying portfolio, sometimes referred to as your initial margin maintenance. Lenders don’t issue dollar-for-dollar loans in case the underlying asset loses value, and they typically give larger loans for less volatile assets.

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So, for example, you might receive up to 90% of the value of a Treasury bond while you might get just 50% of the value of a stock portfolio. This is because the stocks are far more volatile than the bonds. Lenders have no upside in case the stocks gain value, they cannot collect more than the value of the loan, so for them that volatility is pure risk. They want to protect themselves against the possibility that the portfolio will lose significant value, leaving them without enough collateral to secure the loan.

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Talk to a financial advisor about an investment plan that meets your risk tolerance.

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How to Pay Back a Securities Based Loan

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Most securities based loans do not require minimum payments on the loan’s principal. You only have to make regular payments on the interest, which is based on the same terms as the loan itself. Like with a credit card, you only owe interest on the money you have actually borrowed, not the total borrowing authority.

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Interest is one of the main advantages to a securities based loan. Since these are secured loans, they tend to offer very low interest rates compared with other personal lending. However it’s also common for these loans to have variable interest, meaning that your rates can change from month to month based on the market.

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Risks of Securities Based Lending

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The biggest risk arises if you default on a securities based loan your lender may seize the underlying assets. If this happens, the lender may sell off the assets and use that sale to repay the balance of the loan. You will receive any excess, but you will owe any remaining balance. You will also owe any applicable capital gains or income taxes on the sale.

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However, your lender can also track the value of your collateral. If the value of your underlying securities drops too far relative to the value of the loan, your lender may issue what’s known as a “margin call.” During a margin call your lender can require you to either stake additional assets, to increase the value of your collateral, or to repay the loan.

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If you can’t or don’t meet these terms, your lender can sell unilaterally sell assets to cover the value of your loan. You will have no control over which investments they sell or when. If your collateral is not enough to repay the loan, as above, you will be required to make up the difference. Also as above, you will be responsible for any applicable taxes on this sale.

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A margin call is the big danger to securities based loans. Ordinarily, short term volatility in the market isn’t a big problem for most investors. You can hold your assets and wait until prices recover. However if you hold a securities based loan, particularly if you owe a lot of money on it, that volatility can trigger a margin call, forcing you to repay the loan, sell your assets or both. Since market fluctuations are beyond your control, and since bear markets often correlate with larger economic recessions, this is a significant risk.

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Depending on how you use it, a securities based loan can help you access cash from your portfolio while holding your position. But this can be a very dangerous form of lending, especially if you use stocks or other volatile assets as your collateral.

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To determine the best plan for you, talk to a financial advisor today.

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Bottom Line

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A securities based loan is a line of credit that you take out using your investments as collateral. Under the right circumstances they can be a good way to access cash from your portfolio, but be careful. With volatility, you can lose your loan and your investments.

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Personal Lending Tips

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