From medical emergencies to auto repairs and college fees, personal loans can be used to pay for a wide range of needs. However, not many people know that they can also help you to get out of debt. Those who do know may not know about the dangers involved.
Companies like Ladder Advisors Corey Advisors, Carina Advisors, Pennon Partners, Americor Funding, and Credit 9 have been flooding the market with unrealistically low-interest rate offers that promise personal loans for debt consolidation.
What is a Personal Loan for Debt Consolidation?
If debt repayment is one of your biggest priorities at the moment, it is a good idea to go for personal loan debt consolidation. It enables you to take a personal loan and clear all your loans, credit cards, and outstanding debt.
It is safe to say that making several payments to more than one lender is not easy. In many cases, the high-interest rate alone can put you down further and accumulate greater debt.
Therefore, personal loan debt consolidation will make your payment easier and more affordable due to low-interest rates.
How Do I Know if a Personal Loan for Debt Consolidation is Right for Me?
Without adequate planning, going for a personal loan for debt consolidation may increase your spending and result in more debt. That is why you need to consider the following factors before you take the plunge.
You Have a Proper Plan
If you believe that you can just roll all your loans into a massive personal loan for debt consolidation, but have not formulated a financial strategy on how to pay off the debt, then you are setting yourself up for disappointment. More than anyone else, you need to be honest with yourself. Think about whether the new monthly payment arrangement is good enough or you will need another loan to pay it?
You’ve Put a Lid on Spending
Obtaining a Personal loan for debt consolidation does not evaporate your credit card or any other debt. In most cases, an individual’s prior loans ballooned due to a reason: they lived beyond their means. If you don’t change this mindset, then your financial circumstances are not going to change with a personal loan.
On the contrary, if you have decided to mend your ways, then personal loan debt consolidation can streamline and simplify your future payments.
Your Credit Score Is High
If your previous loans have lowered your credit score, you are unlikely to get an affordable rate on a personal loan. The requirements set up by FICO are stringent. Without a credit score around 760, don’t harbor any expectations of seeing a single-digit interest rate.
As long as you pay the minimum on time, even with high balances, you can get a lower rate than credit cards. But, if you were missing payments on a regular basis, a personal loan will not cut it. Luckily, some personal loan debt consolidation services can let you take a look at interest rates before applying.
In case you get to consolidate your debt without any interest rate, there are still some underrated benefits. For example, it allows you to pay a fixed monthly payment that can facilitate you to pay off the debt when the term ends—generally ranging between 3 to 5 years. In this way, you can avoid falling into the trap of minimum payments.
Other Ways to Consolidate Debt
In case personal debt consolidation is not feasible, you can go for the following alternatives.
Balance Transfer Credit Cards
When there are multiple outstanding credit card balances, a balance transfer credit card often serves as a simpler route to debt repayment. What makes this an attractive option is that credit card issuers offer a no-interest payment period on transferred balances. However, there is a catch: you have to pay a high interest after the period ends. It is a good option because:
- Some balance transfer credit cards don’t require you to pay transfer fees and provide an extended 0% introductory period.
- Loan consolidation with a credit card might come with additional monetary or travel perks.
When should you not go for a balance transfer credit card?
- In some cases, they charge as much as 5% (of the debt) as a fee, making your debt bigger than ever.
- They are mostly offered to individuals with high credit scores.
- You need approval for a high credit limit to manage debt.
Home Equity Loans
You can substantially reduce your monthly interest with a home equity loan, but it does come with some risks—after all, it uses your property as collateral. If you don’t have any means to pay your loan, it can end with a possible foreclosure of your property. Here is why you should consider it.
- They offer a lower interest rate than other options.
- If the value of your property has increased dramatically or if you are done with a significant portion of your primary mortgage, it can make you eligible for a home equity loan that can pay your entire credit card balances.
So, what can go wrong?
- Foreclosure is the biggest concern.
- There are several expenses, such as an application fee—incurred during underwriting—or appraisal charges for your property.
What about a Debt Management Plan?
When no debt consolidation option works, then there is a unique way of paying off all your debt. But, first, collect all your loan information and save it in a file. Now, you can go for any of the two debt management plans.
It helps you to get rid of the smallest debt at first. You pay extra cash for the debt with the lowest balance and then move forward to the next-lowest in the queue.
This strategy emphasizes on getting out of the debt with the highest interest rate first. Here, your extra cash goes to the debt with the highest interest rate, and then you move to the next one.
Personal loans are ideal for individuals who fit the following criteria and want to ease up their debt repayments:
- Have a good credit score.
- Have a moderate debt load.
Personal loan debt consolidation is not a magic bullet that can cure poor spending habits. Once you have decided to take some serious steps towards mending your living or consolidating medical debt, you can consider opting for a personal loan.