Things to Consider in Getting a Personal Loan to Pay Off Debt
Friday, June 26, 2020, 6:00 PM | Leave Comment
You’re indeed in a stressful situation if you have multiple debts.
Most of the time, you’ll think about how you can pay them off.
Having several debts takes away your financial freedom and your freedom to live your life in general.
So, how to dig your way out from this predicament?
Most people use a personal loan to consolidate their debts into a single payment.
It’s also a good way to lower your interest and eliminate your debts faster.
Here are the things you must know about getting a personal loan to pay off debt.
What is a Personal Loan?
Taking out a personal loan doesn’t need collateral, which means you can borrow an amount of cash without pledging one of your valuable assets against what you owe.
The loan amount you can borrow when you apply for a personal loan range from $1,000 to $50,000, and this depends on the lender and your credit score. You can repay such loan amounts plus interests on an installment basis over 1 to 7 years or more.
If you’re going to apply for a personal loan for debt consolidation, you can go to the nearest bank or credit union in your place or visit a website of an online lender.
How Do Personal Loans Work for Debt Consolidation?
As mentioned previously, consolidating several existing debts (say, payday loans, store card balances, high-rate credit card debts, etc.) into one debt can be an excellent way to make your financial obligations more manageable. Moreover, you can also save a good amount of money if you take this approach.
Personal loans are a popular option to consolidate debt. When you obtain a personal loan, the money you’ll borrow will be utilized to clear your current debts. After you’ve paid your old debts, your only obligation is to pay the new loan in regular payments, but with a reduced interest rate.
Pros and Cons of Using Personal Loans for Debt Consolidation
There are benefits and drawbacks of using a personal loan to pay off multiple debts. It’s a must that you know about them to determine if it’s good for your situation or not.
Advantages
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Every month you’ll only pay a single payment to one lender, which allows you to manage your finances in a convenient and efficient way.
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There’s a potential to lower your interest when you take out a personal loan to consolidate your existing debts. You can find competitive interest rates for loan amounts of more than $5,000.
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Less interest means less monthly payments. This benefit begets another benefit, namely paying off what you owe faster.
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A personal loan has an excellent repayment structure that allows you to make fixed installment payments. It means that you’re certain how much to pay every month, making your payment a no-hassle to budget.
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You have the option to choose the loan term. For personal loans, the loan term can go as long as 1 to 7 years.
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Timely payments of the loan can have a positive impact on your credit profile.
Disadvantages
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Some lenders won’t let you take out a personal loan to consolidate your debts. That’s why you should ask the lender before you send your loan application.
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Low-interest rate personal loans are only available for borrowers with excellent credit ratings. So, it may not be reasonable to apply for it if you only rake in a higher interest rate.
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If you’re offered a personal loan with a high-interest rate, you have to make higher monthly payments than before.
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If you pick a longer loan term, you’ll pay more in interest.
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Some personal loans come with additional fees and prepayment penalties. So, you better ask the lender about such things before you apply for this loan type.
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Paying off one or more of your current debts early using a personal loan may incur prepayment charges. So, check if the debts you want to clear don’t have early payment penalties.
Important Considerations
First, you have to make sure that you can save money if you utilize a personal loan to pay off your outstanding debts. Check if the interest rate is suitable for your financial situation. You also have to inquire if the loan has additional fees or prepayment charges to avoid paying more on the loan than what you can afford.
Second, you should determine the amount you need to borrow and whether you can get approved for that loan amount. It’s also a must to consider how long you have to pay the money you’ll borrow. Keep in mind that the longer the loan term, the more you’ll pay for the interest.
Takeaway
A personal loan can be an excellent means to pay off your outstanding debts and reduce your monthly payment. However, there are things that you need to consider when using a personal loan for this purpose. The information in this blog article will guide you in your decision to obtain a personal loan to consolidate your debts.
Throw us a like at Facebook.com/doable.financeAuthor’s Bio:
Bree Diaz is a content writer who specializes in writing about personal finance and improving one’s financial health. She has ample knowledge about debt management and has written several pieces to reputed journals. Bree is also an avid traveler and a hobbyist.
