Consolidating multiple debts does not rely on one formula. There are different options for you to choose from. To ensure that you can be successful, you have to choose the right strategy to get out of debt. The key is to understand your financial situation and the type of debts that you have. If you have to consolidate the debt under one credit account, you want to ensure that it can accommodate everything.
But why should you consolidate debts in the first place? Well, Americans owe a lot of debts and it is not just one credit account. Most of the time, consumers carry a balance in multiple accounts. And that makes it hard for consumers to focus on paying it off. According to a survey, 14% of respondents admitted that it is difficult to juggle all their bills. The same report revealed that they feel hampered because of their growing debt.
Obviously, the struggle is real when you have a lot of debts. This is why consolidating multiple debts is a good idea. It helps restructure your debts to make it more simple and affordable. It will not damage your financial situation further. Instead, this debt solution will help you improve your finances – maybe even better than when you first started.
The question is, what is the right strategy that can help you consolidate your various debts? The challenge is finding the right debt solution that will work well with your financial situation. Among the choices that you have are personal loans and balance transfer cards. How will you know which of the two you can use to achieve debt freedom?
When is personal loans ideal for consolidating multiple debts
Reports reveal that personal loans are growing in popularity. In fact, the use of personal loans has grown by 40% over a period of 4 years. Consumers have come to realize how it can be useful in helping them reach financial goals. One of the things that you can use it on is consolidating multiple debts.
But before you decide to use it, let us consider the pros and cons first.
Advantages of using personal loans
When consolidating multiple debts through a personal loan, you get a couple of benefits.
First of all, you can borrow as much money as you can qualify. You can even borrow up to $100,000 if you want to. Of course, the lender will have to approve the application. That means you should have a good credit score, to begin with. You should also prove that you can afford to pay it back. If you have the right qualifications, you can also enjoy a low-interest loan. At least, it will be much lower than the high-interest credit cards that you are trying to consolidate.
These loans also come with a structured repayment plan that is consistent every month. This will allow you to budget your finances easily. It will help you plan your money around your debt payments to ensure that it will be completely paid off.
While it is not advised, a personal loan can also be used for other things apart from consolidating multiple debts. If you need to pay for something that will help increase your income, you can use this loan. Of course, you have to be careful. You need to make sure you will not be irresponsible when using the personal loan.
As you pay off the loan, you will see that your credit score will steadily improve. This will help set you up financially after you get out of debt.
Disadvantages of using personal loans
One of the disadvantages of personal loans is also one of its advantages – the freedom to use it any way you like. If you do not have the self-control to use it properly, you might end up with more debt than when you started. Better to keep yourself from the temptation if you know it will only make things worse.
And while it may not be as high as the credit card interest rate you are consolidating, it will still make you pay interest. It will also be a bit higher if you have a bad credit score. There are also fees that might be imposed on you – like origination fees.
When you want to use personal loans in consolidating multiple debts despite the disadvantages, make sure that you are guaranteed loan approval. Not only that, you have to prove that you can pay it back. This and a good credit score will help you get a low-interest rate on the loan. This will help you save money in the process.
In case you think that the disadvantages make this debt solution unappealing, you can always opt for a balance transfer.
Signs a balance transfer is ideal in consolidating multiple debts
Consolidating multiple debts through balance transfer is another option that you can use to solve your credit situation. But to make it successful, you need to know the strategies that will make balance transfer a huge success.
Before that, let us get to know the advantages and disadvantages of using this debt consolidation strategy.
Advantages of using a balance transfer card
The main reason to use a balance transfer card is the 0% interest rate. This card is usually offered with an introductory interest rate. Some are offered at a very low rate. But that is not what you should be looking for. You want the 0% interest rate that is offered for more than a year. When you get this, you will be paying only the principal debt that you owe. This will help you pay off the debt faster.
As long as you stick to the payments, you will save a lot of money. If you exhaust all your extra money to pay the debt, you might be able to pay it all off before the introductory promo period expires.
Some of these balance transfer cards are also offered with rewards and loyalty programs. If you will learn how to use it properly, you might be able to take advantage of the rewards. This can save some money or allow you to enjoy perks when you use it.
Disadvantages of using a balance transfer card
When it comes to the disadvantages of using a balance transfer card in consolidating multiple debts, there are also a couple of things that you should consider. For starters, there is a balance transfer fee that has to be paid. There are options to waive this fee but that would mean getting a shorter introductory promo period. Calculate the costs so you will know which option will help you save money.
There is also a limit to the debt amount that you can consolidate. You only have until the credit limit. If your debts are beyond that amount, you cannot consolidate everything.
While the appeal of the 0% interest rate may be appealing, you have to be careful when using this debt solution. You should make sure that you have a repayment plan that can take advantage of the interest rate.
Consolidating multiple debts is not that difficult to do if you have the discipline to control your spending habits. Just make sure that your choice in terms of the debt relief strategy considers your financial situation. Choose the option that you can afford and will take you closer to your other financial goals.