More and more people, however, are taking out personal loans in order to consolidate an existing debt. This can be a helpful financial decision for some, but there are many things to consider before using a personal loan for debt consolidation.
Why Personal Loans?
There are various reasons why people are opting for personal loans lately. Some of these reasons include:
• Fairly low interest rates
• Low monthly payments
• Fixed payments that are easy to budget for
• The ability to pay off your debt faster
In some cases, taking out a personal loan means you can get rid of your debt in around three years – without causing more problems to yourself with the high interest rates of multiple loans. Plus, personal loans are exactly what their name suggests: personal. You don’t have to explain to anyone why you need it – and therefore, they can be used to consolidate your debts.
When Should I Consolidate?
As mentioned, there is no reason why you shouldn’t be able to use personal loans to consolidate your debts; however, there are some things to consider. Usually, a personal loan for debt consolidation is a great move if:
• The bills are piling every month and there are too many for you to handle
• You are trying hard to make the minimum payments on your debt
• You weren’t able to negotiate a lower interest rate on your other debts
However, while the above points may be the most important, you still need to think things through before applying – otherwise, you might just find yourself with even more debt. Here’s what you may want to consider first:
• You have a plan: Taking out a loan without having any idea of how you’re going to pay it might just throw you even deeper into the debt hole. Before taking out the loan, make sure that you have a plan that’s already well-thought-of.
• Your debt is under control: If your debt is significant but not totally out of control, then a personal loan may be a good idea to consolidate your debt. If you need moderate amounts to pay off your debt and expect that you’ll pay off the debt within the next six months or so, then a personal loan might be a good idea.
• You know how to budget: Swapping one debt for another won’t make the problem magically disappear. Only consider taking out a personal loan to consolidate your debt if you have your spending under control.
• You have a high credit score: If you already have bad credit, then a personal loan might not make much of a difference. Only go for this option if your credit score is good enough to receive low interest rates.
Overall, you should take a personal loan to consolidate debt in cases where you have a moderate load to handle. A good credit score may also be needed since the purpose is to get a lower interest rate – not a higher one.