Is it wise to use a personal loan for debt consolidation? According to statistics, this is the fastest rising lending category for American consumers. It may not be the highest consumer debt, but more and more people are borrowing personal loans for various reasons.
The great thing about personal loans is you can use it for just about anything. Some people use it to fund their wedding. Others will borrow this loan to pay for a vacation. There are also people who will apply for this loan to pay for their multiple debts.
4 reasons to use personal loans for debt consolidation
Using personal loans for debt consolidation is not a foreign concept. There are people who borrow this specific type of loan and use it to pay off their credit accounts. While it can be effective, there are a couple of signs that will confirm if you should use this or not.
You have a good credit score
This is actually true for all types of credit that you will borrow. You want to make sure that you have a good credit score because that will help you get a lower interest rate on the loan. When you have a low rate, it will help you save a lot of money on the overall payment that you will make on the debt. If you are doing this for credit card debt consolidation, then it will make a lot of sense. After all, credit cards are notorious for their high-interest rates. You should not borrow with poor credit because you will still end up with a high rate on the loan. Not only that, when the personal loan pushes through, it will temporarily pull your score down. Consider that before you use this for debt consolidation.
You know how to pay it back
Another sign that you can use a personal loan to consolidate debt is when you have a plan in place to pay it back. This means you should have an idea where you will get the money for the payments. If you have no idea, then you should not push through with the application.
Start by looking at the monthly payments on the new loan. You can inquire about the amount with the lender or you an estimate it through an online calculator. If you know that you will be struggling to meet the monthly payments, then you need to reconsider the debt solution that you have chosen. Be honest about how much you can afford because failing to do so will only make your financial situation worse.
You do not need a debt reduction
This is in connection with the previous reason. If you find yourself unable to meet payments, you should ask yourself if you are in need of a debt reduction. Some people opt for debt consolidation because they have the income to help them pay off their debts. They only need to re-organize their debts because it simplifies their payments. However, the fact remains that the problem is not in the financial resources.
If you know that your debt situation is getting worse because you lack the financial resources to pay it back, then debt consolidation is not enough for you. In fact, it might be better for you to use a debt solution that gives you a debt reduction – like debt settlement.
You can control your spending urges
Finally, using a personal loan to consolidate debt make sense if you are disciplined enough to control your spending habits. According to a survey, the impulse buying habits of Americans cost them $5,400 each year. Usually, it is spent on food – specifically eating out.
The truth is, when you are trying to get out of debt, you need to make sure that you can curb these impulsive buying habits. It was what got you into trouble in the first place. Not only that, the personal loan you are borrowing might be in trouble. Unlike a specific debt consolidation loan, you will be taking charge of using the money to pay off your multiple debts. Once you get the money, you need to have enough discipline to stop yourself from using it for something else. You should immediately use the money to pay off your debts so the temptation will be gone.
Reminders when using personal loans to consolidate debt
Unless you have all four, you should not jump into using personal loans as your option to consolidate debt. But beyond that, there are a couple of things that you should be reminded of.
- You still owe money. Do not forget that you just shifted the debt around. You did not really pay it off yet. What you did was to gather them together under one loan. You still have to pay it all off slowly but surely.
- Commit to your debt repayment plan. Another reminder is to stick to your repayment plan. You should not falter nor should you miss out on any payment. If you want, you can set it up with the bank so your payments are sent automatically. You just have to make sure your account is always funded.
- Don’t add more debt. The last reminder is to ensure that you will not add any more debt to what you owe. If you used the personal loan to pay off your credit cards, you need to keep those cards first. It will be very tempting to use them now that they have zero balance. But you have to control yourself until after you have paid off the personal loan that you borrowed for debt consolidation.