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Establishing Good Credit with Small Personal Loans

Updated on June 19, 2013

Credit unions often have the best interest rates

Be sure to check out the interest rates at your local credit unions.
Be sure to check out the interest rates at your local credit unions. | Source

Small loans can help you develop a good lending reputation

Many people think of banks, credit unions, and their loan officers as unkind judges who off-handedly reject people needing to borrow money. In truth, they want to lend money. It is how they make money so it is in their best interest to help you build a good credit. Building a relationship of trust with a bank, credit union, or savings and loan is the best way to establish credit. This route results in a smooth ride and a better interest rate when it’s time for a large purchase.

Making small unsecured loans is one way to establish credit. An unsecured loan is used to purchase something the bank cannot reclaim, such as home improvements, professional development classes, or electronics. A borrower can also attach something to a loan as collateral that the bank can reclaim if you fail to pay back the loan, for instance property or some other item with a value equal to or greater than the amount of the loan. But most of us do not start off with expensive items we can lay down as collateral for a loan. Without a good credit history, it is also hard to get a loan for a higher ticket item like a car.

Before filling out any papers, ask a loan officer at your bank about the smallest amount they will loan. Let the loan officer know that the purpose of the loan is primarily to establish credit and she should understand why you want to know about your chances of being approved before applying. Also ask about the longest repayment period for that amount, the origination fee, and the interest rate, and what your payment will be. Get this information before filling out forms for a loan because if you are turned down, it brings your credit score down a notch.

If your bank is not willing to make a loan to you, ask why. Get specifics and ask what you can do to earn their trust. Do you need a co-signer? A co-signer promises to pay off the loan if you cannot. It must be someone with an income that can cover the loan and with a good credit rating. If no one in your life is a good candidate for co-signer, tell the loan officer and ask what you need to do to make a loan without one. If your bank will not work with you on this endeavor, find another bank.

Once you have the money from your first personal loan, you can do one of two things. You can spend it if you are confident that you can make the payments throughout the term of the loan. You could also put the money in a savings account and make the payments out of the savings account. It is important to make the payments every month and not to pay the loan off prematurely (unless you foresee a problem making payments in the future). The longer the loan period, the more the credit rating companies smile on you.

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