A personal loan is one of the strategies that you can use to consolidate debts. It can be very effective in getting you out of debt – as long as you know how to use it correctly.
If you look at the current statistics, you will realize that it is the fastest growing product in the credit industry. In fact, over the past 4 years, personal loans increased by 40% and is estimated to be at $141 billion in 2018.
This is evidence that more and more people are recognizing the benefits of using this type of loan over the other credit options. As a debt consolidation strategy, it can help restructure your repayment plan so it is easier to pay off completely.
Why a personal loan is great for debt consolidation
You may be wondering, why not just use a specific debt consolidation loan or a balance transfer card? Both of them can help combine your multiple debts. Well, there are financial situations when a personal loan is the better option. Here are the reasons why this type of loan is growing in popularity as an option to consolidate debt.
It can be used for anything
First of all, it can be used for just about anything. A debt consolidation loan can only be used to consolidate debts. But if you are trying to achieve more than one financial goal, it makes more sense to use a personal loan. For instance, if you want to buy more energy-efficient appliances at home to save on energy, you can borrow more than what you need in debt consolidation. That way, you can consolidate your debts through a personal loan and at the same time, work on lowering your utility bills through energy-efficient appliances.
It is easy to qualify for
Another reason why a personal loan is better is the fact that it is easier to qualify for it. At least, one study shows this. Apparently, only 1 out of 4 applicants of personal loans are denied. This is a good statistic compared to credit card applications that have 1 out of 3 disapproval rate. This is an indication that among the other popular types of credit, this does not have strict qualifications. You have a higher chance of getting approved the first time you apply.
It has a lower interest rate
You can also expect that a personal loan will help you get a lower interest rate. If you have a good credit score, you will get even more favorable rates. This will help you save a lot of money – especially when you are mostly consolidating high-interest credit card debts. It will allow you to use that money on something else – like to help you reach another financial goal.
It offers a fixed monthly payment
Finally, a personal loan will give you a fixed monthly payment plan. This means you will pay the same amount for the whole repayment period. This will allow you to create a debt repayment timeline that is both predictable and affordable. It will make budgeting easier. You know what to expect in terms of your payments. That means you can plan your payments better to ensure that you will not fall short and run out of funds.
Important rules when borrowing a personal loan for debt
Now that you understand what a personal loan can do, it is time to learn how you can use it effectively. You have to understand that consolidating debts successfully means implementing the strategy properly. Getting the loan to consolidate debt is just the first step. You still have to pay it all off. That means you have to set up the loan to make sure that it is easy for you to pay it all off.
Here are important rules that will help you accomplish that.
Borrow only what you need
Before you borrow a personal loan, make sure you only apply for the amount that you really need. If you will use a portion of it for something else – make sure it will help you save money or increase your income. If it will be used to buy something unnecessary or finance a vacation that you can live without, then you may want to think twice before adding that extra amount.
Have a repayment plan
Another important rule that you need to do before borrowing a personal loan is to make sure you have a repayment plan in place. At the very least, you need to have a draft. This will help you calculate if you can really afford to pay back the loan. If not, then you need to make adjustments to your budget to ensure that you can afford this. That way, you are sure that you can really achieve debt freedom.
Stop borrowing more
Finally, you need to make a commitment to stop borrowing after you have consolidated your debts through a personal loan. Do not worry because this will not be forever. You only want to get rid of the debts that you owe right now. Borrowing more money while you are in the midst of a debt relief program is like trying to empty a pail of water that is under an open faucet. You will never be free from debt if you will not do something about your debt situation.
You have to remember that a personal loan is only a tool that will help you achieve debt freedom in an easier and simpler manner. Even if you get approved of this loan, you still have a lot of things to do. There is still a long road ahead because you still have to pay off this loan to be completely debt free.