If you are having a tough time repaying your high-interest loans or your credit card debt, you do not require someone to point out how challenging it becomes to pay off your debts. It is a good idea under the circumstances to take out a personal loan to consolidate your multiple debts and roll them all into one single loan with a relatively lower rate of interest and only one single monthly repayment. You need to determine if debt consolidation using a personal loan is the right choice for you. Let us understand what the financial experts feel about it.
Debt Consolidation Is Not Meant for Everyone
Debt consolidation with a personal loan has the potential of reducing your monthly payments and lower your interest rate but not everyone should or could take out a personal loan for debt consolidation. As per a qualified financial planner, you must opt for debt consolidation with a personal loan only if it is perfect for your unique requirements. He further points out that there are three kinds of people who could be benefited by debt consolidation. They are:
- People who are thinking of combining multiple loans into one single account.
- People who are eligible for a relatively lower interest rate.
- People who are planning to pay off all their debts over a shorter time span.
Before you consider debt consolidation, make sure that you are eligible for a personal loan that promises affordable monthly payment. For qualifying for a suitable personal loan for debt consolidation, you would be requiring proof of stable & steady income, and of course, decent credit scores preferably 700 or more. Suppose you are having poor credit and you are not having a steady or adequate income, you would require a cosigner for qualifying.
There are some serious repercussions for missing payments, so you must have complete grip over your finances and there should be enough scope in your budget to allow loan repayment. In this context, you must know that borrowers who have been acknowledged as cash flow masters and who have a sound knowledge of how money comes and goes, would be the right kind of people for using personal loans for debt consolidation.
Avoid Debt Consolidation If You Cannot Curb Your Expenses
Financial gurus have actually determined two great dangers of considering a personal loan for consolidating your debts:
- Assuming that you have completely solved your debt issues with this loan.
- Taking on brand new debts when you have successfully consolidated the previous or existing ones.
You need to understand that transferring debt does not imply emancipation from debts. When you are taking out specifically a personal loan for repaying your existing debt, you have simply moved your debt around just to make the most of better repayment terms. Once you have done debt consolidation, you must generate a strategy for repaying your debts on time.
If you are really serious about getting rid of debts, the debt avalanche and the debt snowball methods are supposed to be two effective ways of repayment. Moreover, you need to modify your spending habits and overall lifestyle. Come up with a detailed budget. Keep monitoring your spending pattern for a month, or maybe a couple of months to make sure that you are able to lead a perfect life after lifestyle modifications. Once you know for sure that you would not accumulate credit card debts again, you may consider debt consolidation.
Avoid Concentrating on Monthly Payments Alone
Numerous people opt for debt consolidation with the sole intention of lowering their monthly payments. However, often we find that monthly payment may get reduced as a result of debt consolidation with a personal loan having a lower rate of interest. But you simply cannot ignore the loan term. An extended loan term would mean paying a lot more interest over a period of time. You must focus not just on monthly payments but concentrate more on the total cost of your personal loan.
Often you tend to forget that the actual culprit is the extended loan repayment term because in such a case, even though the interest rate is lower, the actual amount you pay back to the lender is more because you are paying back over an extended period of time. You may browse through debt consolidation and debt settlement reviews online for learning more about perfect debt relief methods and debt-related solutions.
Consider the Result of Debt Consolidation
As per https://www.forbes.com, “the critical question is what borrowers do after they consolidate? Borrowers who reduce their monthly payments should use the monthly savings to accelerate the pay-down of their mortgage balance, but many don’t. Some view a payment-reduction consolidation as a license to take on more non-mortgage debt. A few years later, they look to consolidate again.”
Choose the Right Lender & Examine the Loan terms
Finally, you must not forget the importance of shopping around before you choose the right personal loan for your debt consolidation. You need to constantly remind yourself that all lenders would not be the same and should not be judged with the same yardstick at all times. It is a good idea to check out multiple lenders and see what they have on offer. You may do ample research and thorough studies so that you could come up with a comparative analysis. You must understand that when you are checking out multiple lenders, it is surely the most effective way of ensuring that you would get the best deal possible in terms of the interest rate and loan term.
Moreover, it is a good idea to read carefully the fine print so that you could have a clear understanding of the total fees and costs involved. Most people take it for granted that the interest rate is of great consequence but more often than not, there are some other hidden fees you need to worry about. For instance, there are certain lenders who would be imposing prepayment penalty that would imply that you would be penalized in the event you pay off your loan well in advance of the scheduled time. You may request a list of all the fees related to the loan written clearly and in a concise manner.
It is a good idea to consolidate high-interest debts using a personal loan with a relatively lower interest rate and saving a huge amount of money. Avail the opportunity if you are qualified for a loan having better terms and if you are planning to modify your lifestyle and consciously stay out of debts or keep them under strict control.