Most people take out loans because they need the money. Maybe you want to buy a house or a car, or maybe you’re looking for a way to pay down existing debt you already have.
However, taking out a loan doesn’t always mean you need the money.
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Here are three reasons why you might consider taking out a loan even if you don’t need the money today.
You’re Looking To Give Your Credit Score a Boost
When you’re just starting out as an adult, it’s likely that you don’t have much of a credit history. Unfortunately, this can be a roadblock for many people.
Having established credit will be important when you want to rent an apartment, buy a car and eventually purchase a home.
Many people choose to start building credit by taking out a starter credit card. While these typically have a small credit limit, unless you make smart decisions, credit cards can end up hurting your credit more than helping it.
This is why, for some people, it might make more sense to take out a personal loan instead of a credit card to build credit. However, you’re not going to use the loan.
Instead, you’re just going to pay it back gradually, allowing those on-time payments each month to build your credit score.
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So how does this work? You’d start by applying for a small personal loan of a few thousand dollars. When your money is distributed, place it into your savings account where you won’t be tempted to spend it. From there, you’ll set up automatic monthly payments for the next 12 months so you never miss a due date.
Since you won’t be using any of the money, the only cost will be the interest accrued each month. Because you don’t have much of a credit history, your interest rate will be a little higher.
However, if you’re willing to have a family member with good credit co-sign with you, this will reduce how much the loan will cost.
While it might seem foolish to pay interest on a loan that you’re not using, for many younger adults, this is the safest path to take. It helps them avoid getting into debt and helps build credit for the future.
You Need It for a Rainy Day
Unexpected expenses can pop up at any time. This is even more true if you’re a homeowner. You could have a leaky roof that needs to be replaced, or your heat or air conditioning could stop working.
While you might have an emergency fund that could cover the cost of small emergencies, it might not be enough for something large.
Most people turn to credit cards at this point. However, instead of paying for the repairs with a card that could have an interest rate of 20% or more, you could use a home equity line of credit (HELOC).
HELOCs provide homeowners with a line of credit they can use at any time. The nice thing about HELOCs compared to a home equity loan is that you only need to tap into the equity in your home (and start paying interest) when to actually need the money.
Because HELOCs have a significantly lower interest rate than credit cards, this could be an ideal way to pay for unexpected expenses when emergencies pop up.
One benefit of a HELOC is that you can apply today, go through the underwriting process and not take a draw until you need it, if at all. Knowing you have the money available if needed can provide you with peace of mind.
You Could Earn a Higher Return From an Investment
Using money from a loan to invest comes with significant risk, but if you’re experienced and the terms make sense, you could leverage the loan for a nice return.
Most online investment brokers give experienced investors the ability to trade on margin. This means that in exchange for interest payments, you can borrow money from the broker to invest more than you have available in your account. Unfortunately, margin rates with most brokers can be 10% or more and leave you with significant risk.
Another option is to leverage a home equity loan or HELOC. These tend to have much lower interest rates and can allow experienced investors to earn more than the loan would cost.
However, it’s important to keep in mind that if you’re unable to make the payments on a home equity loan or HELOC, you could lose your home to foreclosure.
This means you should only use a loan to invest if you’re experienced and willing to take the risk.
The Bottom Line
Many people take out loans because they need the money. However, there are certain situations where it might make sense financially to use a loan even if you don’t have an immediate need.
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This article originally appeared on GOBankingRates.com: 3 Reasons To Take Out a Loan When You Don’t Need the Money
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