Ideally, taking another loan to consolidate debt is not something anyone would want to do. However, there comes a time when borrowing money to repay your loan is the only way to get you out of a tough situation. This usually makes sense, especially if you are dealing with a high-interest loan.
Thankfully, there are several ways you can consolidate debts. Many people these days use personal loans to repay their debt. These loans come from banks, online lenders, or credit unions. Once you get the money, you can use it for various purposes, including repaying your balances.
When to Use a Personal Loan to Consolidate Debt
Choosing to consolidate debts with a personal loan means trading one debt for another. But, this strategy offers various benefits for people who qualify for low-interest rates and reasonable repayment terms. Here are the instances where consolidating debt with a personal loan makes sense.
You Have a Good Credit Score
Lenders look at your credit score to determine whether or not to offer you the loan and the loan terms. Borrowers with an excellent credit score can get personal loans with a low-interest rate. That means you will get a loan charging less interest than what you’re paying on your current debt.
Also, note that borrowers with a poor credit score can get a personal loan. But, it may not make sense as they may be charged higher interest rates than even their current debt.
Different lenders charge different rates. Make sure you compare the loan offers to see what you qualify for.
You Can Consolidate Debt into a Single Payment
Loans charge different payments and APRs. Thus, organizing your repayment plan can be difficult if you have several loans. For this reason, it can be hard to maximize your monthly payments and get out of debt soon.
However, a personal loan can help you get rid of several payments and narrow them down to a single monthly payment. And if you are lucky, you get one with a lower APR.
You Can Afford the Personal Loan
It’s essential to consider this factor to avoid entering into a cycle of debt. One of the benefits of personal loans for debt consolidation is that they feature fixed monthly payments and interest rates. But this could also be a drawback if your monthly budget doesn’t allow you to make the fixed payments each month.
Explore all your options before taking out any loan. For instance, many lenders offer balance transfer credit cards that charge a 0% introductory fee to borrowers with great credit scores. If you qualify for this and can pay all the loans before the introductory period lapses, go for it. But the downside is that lenders usually cap the amount you can transfer at $15,000. A personal loan, therefore, may make sense if your debt is more than this amount.
The Loan Will Improve Financial Situation
Many people consolidate debts to make the repayment affordable. However, this does not necessarily mean a lower APR for your debt repayment.
For example, you can decide to pay off debt faster with a personal loan of a shorter repayment term of 12 months. While you may reduce the interest rate, you may have a higher monthly payment.
But you can decide to choose a personal loan with a longer repayment period to lower the monthly payments. While you’ll pay more interest in the long run, it can free up your cash, which you can use for other financial expenses.
When Not to Take a Personal Loan for Debt Consolidation
Taking a personal loan to pay off your debt can save you money. However, this may be unsuitable in some situations. There are instances where you may want to try a different method to consolidate debts. These include;
Small Debt Amount That You Can Repay Quickly
If your debt is manageable and you can repay within 12-21 months, a balance transfer may be your best option. If your account offers a 0% APR credit, you’ll not pay any interest to transfer your debt to this account. But, of course, transfer fees are usually charged. These are usually 3-5% of your transfer debt. But they are worth it, considering how much you’ll save on the interest if you can repay your debt during the 0% introductory period.
Your Debt Situation is Out of Control
If you have a huge debt such that paying off without help is impossible, consider working with a debt relief company. Taking a personal loan, in this case, may not make sense as it probably will not pay off all your debt. Instead, explore your other options and decide which will work for you.
Consolidating debts with personal loans makes sense if you’re offered a low-interest rate and low monthly repayment than what you are paying on your current debt. However, they may not be suitable in all situations. Make sure you consider all the options available to you before making any decision.
Lisa has a Bachelor’s of Science in Communication Arts. She is an experienced blogger who enjoys researching interesting facts, ideas, products, and other compelling concepts. In addition to writing, she likes photography and Photoshop.