No one likes being in debt or accumulating debt over a period of time. However, people often find themselves in a situation where their finances have gotten out of hand and they have a mountain of debt that they have to pay off. These situations are becoming more common and it is always best to consider your options when you are going through a financial crisis. One of the best options available to people in debt is to choose debt consolidation to get out of debt.
It is basically a personal loan that individuals can use to pay off high interest debt, such as credit card debt. When you consolidate your debt, you can pay off your credit card balances in full and benefit from a simplified repayment plan. This could help save you time and money, depending on the terms of the loan and the amount of your debt. However, you need to consider your financial goals and your circumstances before deciding if a debt consolidation loan is the best choice for you. Here’s what you need to know about it.
When Should You Consider a Debt Consolidation Loan?
Personal loans can be acquired for any reason and anything, but if you are using them for debt consolidation, here are the cases where it can work for you:
You have an excellent credit rating
People can get personal loans with any credit score, but if you want lower interest rates and great terms, Harris and his partners advise that you should have an excellent credit score, which should be above 670.
Your debt is at high interest
The average interest rate for personal loans is 9.41%, but the average interest rate for credit card debt is 16%. This is a significant difference, and people who can qualify for lower rates than what they are already paying should consider debt consolidation loans to save money in the long run.
You have a repayment plan
One of the worst things about credit card debt is that it is constantly revolving which means you borrow and pay off the funds on an ongoing basis, but there is no repayment plan. If you use your credit card and only pay the minimum each month, you could end up paying off your debt forever. However, personal loans have a repayment plan which makes them a great option if you can stick with it as it helps you get out of debt quickly.
While there are some obvious benefits that you will have if you get a debt consolidation loan, there are times when it might not be the best option for paying off your credit card debt. These include:
You haven’t changed your spending problems
A debt consolidation loan is advantageous because it means that you can use the credit available on your credit card. However, once you transfer the debt and continue to accumulate debt on the card you recently paid off, your financial situation could get worse. Hence, you need to sort out your spending problems before acquiring a debt consolidation loan.
You have poor or fair credit
Even people with bad credit can get approved for personal loans, but they will pay higher interest rates. This will increase their costs and sometimes make monthly payments difficult to repay, which would defeat the original goal of getting a loan.
You only have a small amount of debt
If you think you can pay off your existing credit card debt quickly over the next six months to a year, the savings you would make from a debt consolidation loan are not going to benefit you. You don’t need to take out a personal loan when you can easily pay your monthly credit card payments.