If you are struggling to pay off high-interest loans or credit card debt, you don’t have to tell anyone how much interest is hampered when you want to pay back what you owe.
But you can often lower your interest rate by taking out a personal loan to consolidate your debt. To find out if this is a good option for you and to better understand the advantages and disadvantages of using a personal loan for debt consolidation, read the tips from financial experts.
1. Debt consolidation is not for everyone
Debt consolidation with a personal loan can lower your interest rate and lower your monthly payments – but not everyone can or should take out a consolidation loan.
“Do it only if the conditions are right for you” – advised Will, a certified financial planner. In addition, he identified three types of people who can benefit from debt consolidation:
People who want to combine several loans into one debt
People who qualify for a lower interest rate
People who want to pay back their loans in less time
Mr. Will warned, however, that before proceeding to debt consolidation one should make sure that you can qualify for a loan with affordable monthly payments.
To qualify for the desired consolidation loan, you usually need a good credit rating and proof of stable income. If you have weak credit points and don’t make much money, you will most likely need a guarantor to qualify.
There are serious consequences for missing personal loan payments, so make sure you have control over your finances and budget space to pay back the loan.
“Borrowers who are masters of cash flow and really understand how money appears and disappears from their budget are well placed to use this type of loan,” said Donnie Becks, a certified financial planner, financial advisor and president of the loan company.
2. Do not consolidate if you have no control over expenses
Financial experts have identified two major dangers associated with using a loan to consolidate debt:
Thinking that you have solved your debt problems with a new loan
Incurring new debt after consolidating old accounts
“Moving debt is not enough to get out of debt,” said Lisa Milner, a certified financial advisor. When you take out a personal loan to pay off your second debt, all you did was transfer your debt to benefit from better repayment terms. This is not a substitute for a detailed plan that authorizes you to pay back the debt.
After consolidation, create a debt repayment strategy on schedule. You also need to make sure that you change your spending habits. That is – create a detailed budget and track expenses for a month or two to see if you can survive peacefully during this time. Once you are sure that you will not accumulate credit card debts again.