Personal Loan For Debt Consolidation
Using a personal loan for debt consolidation could lower your interest rate and make it easier to manage your monthly bills. However, it won’t really solve the bigger issues. It is more of just a vice to get a car up in order to fix the real problem.
Personal loans have become much more common in the past decade, basically used for small projects, considerably large purchases, and for debt consolidation.
Availing a personal loan in order to pay off high-interest credit card debts may seem like a quick and easy solution, but it’s not to be taken lightly. Debt repayment is as much about a change in mindset as it is about a change from credit cards to a bank loan.
Taking out a personal loan may just open you up to even more expenses and debts if you aren’t well prepared. Here is what you should consider before doing so:
- You are planning to pay off your debt
- Your debt is considerably large but not out of control
- You’ve got your spending under control
- Your credit score is high enough to avail of low rates
- You don’t have access to 0 per cent APR credit card offers
Debt consolidation loans
If you’re concerned that your debt situation is getting out of hand, you might want to look into debt consolidation loans. As the name suggests, it is a loan you take out to pay all of your existing debts, so you are left with one single debt with one term and one interest. This makes it easier to manage your debt and in some cases, makes it more affordable. However, just like any loan, it pays to do some due diligence to make the most of the arrangement. Start by checking the loan qualifications set by the lenders. Check the state of your credit rating too, as it is one of the most crucial factors that will determine rejection or approval as well the rates you will be charged with. Compare rates from different lenders too. Most will let you check the loan interest without affecting your credit score in the process
You are planning to pay off your personal loan
You must always have a concrete plan to pay off your debt before making your decision. You might as well not have bothered if you plan to simply roll all your credit balances into one big personal loan without having a proper plan on how to pay the debt off in the next five years. Please note as casual worker this might take a little longer.
Is the new monthly payment feasible? Or will you inevitably find yourself struggling to pay it, which in turn gets you relying on your newly balance-free credit cards? Being practical with your finances and being honest with yourself about your own will power pays. Lying about what you can and can’t afford will only lead to more disappointment and debts.
Your debt is considerably large but not out of control
A personal loan used for consolidating debts is ideal for moderate amounts of consumer debts. Will you be able to pay off your debt in five years? If yes, a low rate personal loan for debt consolidation may be a sensible option.
However, if you are expecting to pay off your debt in the next 6 months or in a year, then a personal loan might not be worth it. Even the smallest amount you’d save in interest isn’t worth all the hassle.
On the contrary, if you haven’t figured out how you will be able to pay off your debt, much less in the next 5 years, then a personal loan might not be enough to help you out. You might need to look for credit counselling- a professional who will set your affairs in order.
You’ve got your spending under control
Using a personal loan for consolidating debts especially if you have multiple loans won’t magically make all your debt disappear. It just moves your debt around. After all, the debt is the symptom you acquire after getting hit by the disease of living beyond your means. If you are aware that the only reason you aren’t still charging unnecessary stuff to your maxed-out credit cards is that they’re maxed out, then a personal loan may be what you need to get you out of your current crunch but doing nothing to stop your excess spending.
If you’ve ever found yourself praying to God about your spending, then a personal loan may be a useful way to simplify and streamline your debt repayment. But if you haven’t, it’s just another way to get yourself more debts.
Your credit score is high enough to avail of low rates
The personal loans available to you may or may not be cheaper than continuing to pay down your credit cards if your debt has done a number on your credit score. The FICO score requirements for the best possible rates for personal loan lenders can be pretty steep. To start seeing low, single-digit interest rates, you might need a credit score over 760
If you pay at least a minimum on time, regardless of how high your balances are, your credit score might be high enough to get a lower rate as opposed to your credit cards. However, if you’ve been missing payments regularly, a personal loan might be nothing more than a lateral move when it comes to your monthly interest payments. Luckily, there are some lending companies that let you check your interest rate before you apply, all without harming your credit with rates starting at 5% APR
With a personal loan, you’ll have to make a fixed monthly payment that will get your loan paid off by the end of the term, usually three to five years. This is a big advantage even if you can’t beat your existing interest rate by consolidating debt with a personal loan. This will make it impossible for you to get caught in the trap of making minimum payments all the time.
You don’t have access to 0 per cent APR credit card offers
No matter where you go or who you ask, a loan with no interest is always better than no matter how low of a rate. A balance transfer credit card might make more sense if you can pay your debt in one or two years and have excellent credit. The key to do this, however, is to plan out how you are going to pay off the debt. The individual moves you make might lead you way off track if you don’t have a concrete plan mapped out.
A personal loan is good for people who are looking to simplify or accelerate their debt payment. These people have moderate debt loads and a good credit score.
These loans will not solve any spending problem whatsoever and they should not be considered by the borrower unless they have already made the decision to live within their means and cut their excessive spending.