Busy lifestyles can lead to money management problems. Reasons to consolidate debt with a personal loan vary according to your financial situation. Consolidating several bills into one personal loan can help you make sense of your budget. If you owe balances on several credit cards or have medical bills that are about to be sent to collections, borrowing a personal loan can help avoid late fees and costs caused by overlooked payments. Here are four reasons to consolidate debt with a personal loan:
1. Save on High Interest Rates
If you're paying double digit interest rates on credit card balances, shopping rates for a personal loan may help you find a personal loan with a lower interest rate than you're currently paying. Paying a few bucks a month in interest may not seem like much, but it adds up the longer you carry balances on your credit cards.
2. Convert Variable Interest Rates to One Fixed Rate Loan
Personal loans typically carry fixed interest rates; there are no surprises due to rate changes that can occur on credit cards with variable rates. Factors that influence rate changes can vary between lenders, so carrying balances on variable rate credit cards makes tracking your finance charges a real headache. Please be aware that personal lines of credit typically carry variable rates as they offer a credit line that can be used over time.
3. Consolidate and Pay Off Debt for Good
How this works for you is based on your spending habits and ability to resist using your credit cards after you've paid off the balances with a personal loan. If you're serious about paying off and staying out of debt, a personal loan could save the day. Here's why. A personal loan is generally made for a specific amount with a fixed interest rate. You'll repay your loan with fixed monthly payments according to a set payment schedule. When you repay your personal debt consolidation loan, you'll be debt free. The Federal Trade Commission cautions consumers to limit their use of credit cards to avoid racking up revolving debt.
4. No Balance Transfer Fees
You may have transferred balances between major credit cards to save on interest only to find that transfer fees take a bite out of potential savings. Personal loan lenders may charge a loan origination fee, but it's important to compare costs charged by personal loan lenders and credit card companies to find your best option.
Consolidate Debt with a Personal Loan: Things to Know
Look at your financial "big picture." Before applying for a personal loan to solve your debt problems, it's important to consider why you got into debt. Did you charge your credit card to its limit to celebrate a wild weekend? Did you use credit cards to pay for emergency medical or veterinary services? The reasons for your card debt can help you determine if debt consolidation with a personal loan can help. If your credit card debt is a hangover resulting from impulsive spending, consulting a credit counseling service may be an alternative to incurring more debt.
- Know your credit scores: Qualifying for a personal loan and its finance charges can depend on your credit score. Personal loans don't require collateral and represent a higher risk to lenders. It's worthwhile to request personal loan quotes from multiple lenders; while one lender may pass on your application, others may offer you a loan.
- Know the difference between a personal loan and personal line of credit: Lenders may offer you a personal line of credit. This type of loan works like a credit card; you're assigned a credit line and can draw against it as needed. A personal loan is made on a one-time basis for a specific amount that's repaid according to a structured schedule. A personal line of credit can lead to more debt if you continue to draw against it after consolidating your debt.
- Eyebrow deep in debt: In some cases, debt consolidation may not be available or enough to address high balances on multiple accounts. Late fees and high interest rates rapidly add to your debt. If your debt is rising faster than you can repay it, please consider consulting a certified credit counseling service. Services offered by professional credit counseling services include evaluation of your debt, development of a cash-based budget and working out repayment arrangements with creditors at lower interest rates. A credit counseling plan works as a debt consolidation option when you agree to make one periodic payment to your credit counseling agency; it distributes payment to creditors included in your repayment plan.
- Shop and negotiate personal loan terms before choosing your loan: Request and compare loan quotes to find a personal loan that best meets your needs. Contact prospective lenders with questions and to confirm rates and fees.