Is Consolidating Debt With A Personal Loan Wise?

By on January 24, 2019
Is Consolidating Debt With A Personal Loan Wise? #rsfmag #ranchosantafemagazine #ranchosantafe #money #moneymanagement #loans

Struggling to pay off credit card debt or some high-interest loans is perfectly normal, and the situation only gets worse with time due to the interest that is tacked on. It is, however, possible to lower the interest rate payable by using a personal loan for consolidating the debt. This may not be a one-size-fits-all solution but is certainly a good one; you should look into the nitty-gritty to understand if it would be a good fit for you. (Image Credit: Pixabay)

Find a Good Fit

Debt consolidation is not a panacea that will wipe out any and every case with ease. You should opt for a consolidation loan only if the terms are in your favor. According to https://www.forbes.com, “With a debt consolidation loan, you typically use the proceeds of the loan to pay off all of your other creditors.” Experts agree that there are three categories of debtors for whom consolidation loans would be a good fit:

  • Those who qualify for a lower interest rate than they are currently paying
  • Those looking to combine multiple loans into a single account for convenience
  • Those who would like to pay off all their debt over a shorter time period.

Before going ahead with the deal you need to figure out if you are eligible for a set of terms on the loan that ensures your monthly payments are actually affordable for you. This is significantly easier for people who can provide proof of steady income and also benefit from a good credit score. If your credit situation is wonky, you might have to bring someone else on as a co-signer to qualify for better terms. You may browse the Internet for debt consolidation and debt settlement reviews to learn more about debt relief techniques.

You Must Be In Control

Personal loans have very strict consequences for defaulters, so you will have to be in control of your financial security to ensure you are able to make that loan payment every month. One of the big dangers of consolidating via a personal loan is the mentality that you have solved all your problems once the consolidation is done, or that you can take on more debt now that you don’t have multiple loans hanging over your head. Transference of debt does not equate to mitigation of debt, meaning debt transferred is not debt resolved. By consolidating, you have simply restructured your debt into a package that might be easier to pay off, but you still have to figure out how to make those payments.

Work on a repayment strategy that ensures you have enough money to pay back the loan after expenses and savings. You can consider the debt avalanche and debt snowball approaches to repaying your dues. Your spending habits need to be analyzed and revamped entirely so that you don’t fall back into the same patterns. If you continue using a credit card that you have paid off with a consolidation loan, you could actually max it out. People with a lot of credit card debt tend to live outside their income, which means large-scale lifestyle changes are needed to ensure they stay within their means. Budgeting and tracking expenditure regularly are extremely important steps in this journey.

Monthly Payments Are Part of a Bigger Picture

By far the most popular reason for people consolidating debt is to get lower monthly payments. This is definitely something that happens, but you usually also encounter a longer term to counter that, which means you end up paying more interest over time than you would have without consolidation. The monthly payment is definitely something to consider if you are on a low monthly income, but you should also zoom out and calculate the total potential cost of the loan before committing. Low interest over a long time could cost more than moderate interest rates over a shorter time.

There are a number of loan calculators available online where you can enter the parameters defined in your loan terms and find out the total cost and also generate a repayment timeline to compare with the plan you might have cooked up for repayment. This should not only give you an insight into the quality and nature of the deal you are signing up for but perhaps also help you handle it better. Experts also suggest that if you are fine shelling out the amount you do each month, you could continue to pay that much even after consolidation, even if the minimum payment is smaller. This will actually help you get debt-free much sooner than their timeline predicts, thus slashing the principal and also the total interest paid.

Read the Fine Print

Not all lenders are the same; financial deals are usually significantly more complex than they seem on the surface. You usually get more than what you sign up for, and not in a good way. This is why it is extremely important to be thorough with your research and interview process when looking for lenders to help you out. Take testimonials and reviews from acquaintances, friends, and family, and also hunt around online. Schedule free consultations with them to speak specifically about your situation and try to figure out if they are able to get a hold of your issues and find a loan option that actually helps you out. Compare all the firms you reach out to ensure you are getting the best possible terms.

You must definitely read the fine print and identify all fees and costs early on, and also any conditions or terms that seem wonky to you. This may not be easy for you, so feel free to contact financial advisers or non-profit organizations who would be willing to advise you for free or for a nominal fee to go through the terms and explain them to you. Ask the lender to list out any and all fees, and look out for prepayment penalties and the like which will penalize you if you try to get rid of the debt faster.

Conclusion

Done right, a debt consolidation loan is a fantastic option for people looking to gain control of their debts and find a way to pay them off quicker and save some money while they’re at it. You should take the time to ensure you are getting a deal that is in your best interest and not falling into yet another debt trap.

About Jacqueline Maddison

Jacqueline Maddison is the Founder and Editor-in-Chief of Rancho Santa Fe Magazine. She believes in shining light on the best of the best in life. She welcomes you into the world of the ultimate luxury lifestyle.

One Comment

  1. Pingback: Debt Consolidation – Benefits and Risks! ⋆ Beverly Hills Magazine

Leave a Reply

Your email address will not be published. Required fields are marked *