When it comes to Americans, most of them have debt issues, especially credit card dues are a record high in the country. That is because more than one-third of American households have an average of $16,048 debt to pay to creditors. During the last few decades, taking personal loans has become a trend to make both ends meet. Opting for personal loans to clear high-interest credit debt may seem an easy alternative, but you should not take it too casually. To be candid, it is not a simple solution to your debt-related problems. Today, many customers are looking for debt consolidation to dig out of personal debt, thus improving their finances. Now the question is whether it makes sense to take a personal loan for consolidation. According to an article published on huffingtonpost.in, consolidating your debt and combining multiple unsecured loans such as medical bills, credit card bills, and personal loans into a single loan will help you cope with your debt issues in a better way. Moreover, it will also improve your credit score and reduce your monthly interest payments. As per the article, today debt consolidation is one of the best financial planning tools if you have too many loan amounts to pay off. However, before taking the plunge, here are five essential things to consider before taking a personal loan for debt consolidation:
- You Have Moderate Debt
You can take a personal loan for debt consolidation provided you have moderate sums to pay off to your creditors. For example, if you know that you can clear all your dues within the next five years, a personal loan is your best debt. However, if you feel confident that you can pay off your loans within the next six months to one year, then a personal loan does not make sense for you. The meager amount you have saved as interest is simply not worth the hassles that come with a personal loan. Again, if you are in the dark or unsure whether you can pay off your debts in the next five to six years, then a personal loan will not do much good to you. In such a situation, you may need the assistance of a credit counselor to help you improve your financial condition.
- When You Plan to Clear Your Dues
Before taking a personal loan, you should plan to pay off your creditors. For instance, if you combine all your credit card dues into a single personal loan with no idea of clearing multiple debts in the next four to five years, then you should not consider the option. You need to ask some questions before taking the plunge. Does the monthly payment seem feasible to you? Will it be difficult for you to clear all dues or you will need to use your balance-free credit card? It will benefit none but you if you are honest about your financial condition and determination to pay off your debt. Indecision and not being honest about what you are capable of and what you cannot manage will result in more debts and financial problems. If you have doubts, you can research on the internet and look for companies who will help you consolidate your all debts with the help of experts from toptenreviews.com
- High Credit for Low-Interest Rates
When you’re overburdened with several debts, and they have taken a toll on your credit score, then a personal loan may not come cheaper. As far as the FICO score requirement is concerned, the best rates for availing a personal loan could be steeper. It means that you should have a credit score of more than 760 if you want the minimum, single-digit rates of interest.
When you have high balances yet manage to pay the minimum amount on time, your score is high enough to fetch a reduced interest rate compared to your credit cards. However, when you fail to make monthly payments on a regular basis, it means your loan is just a lateral move when it comes to paying your monthly interest. Then, you will find some personal loan providers that allow you to check your rate of interest before applying for a loan and without affecting your credit score. At some loan providers, interest rates are a single digit. When you beat the current rate of interest through consolidation with a personal loan, you have some benefits to reap. A personal loan with a fixed rate of payment on a monthly basis will help you clear the dues by the end of the loan term. The term is usually is three or five years. Thus, it makes it unfeasible for you to fall into the trap of making minimum payments repeatedly.
- You Spend Money Sensibly
When you consolidate your credit card loan with a personal loan, it will not make your debt fade away. It will keep lingering. It happens when you spend extravagantly, and your spending is out of your control. Too many debts are just the indication of overspending. A personal loan will only make sense and the last enabler when you stop spending money on things that you do not need. Developing a habit of spending your money sensibly will help you come out of your financial crisis. It is the only way to simplify and organize your debt payment. However, if you keep overspending, you will have more debts.
- A Loan with Reasonable Rates
In addition to the rate of interest, you should factor in another aspect before taking a personal loan, which is an origination fee. It is an upfront payment and non-refundable. Usually, the fee is five percent of the total loan for a consolidated amount. A fee higher than five percent will not do you much good if you are considering consolidation. However, some personal finance lenders do not ask for an upfront fee. Such fees matter because the five percent is deducted from the loan that you ask for from the lender. It means that if you apply for $15,000 loan, you will get $14,250. The fee may be negotiable but attracts a higher interest rate.
Now that you know when to apply for a personal loan for debt consolidation, you can make an informed decision and improve your finances.
Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.