Should you take out a personal loan for paying off debts?

loan

Introduction

Today we have a guest post from Bethanie Parker of https://www.debtconsolidationus.org/blog/. Where she talks about the benefits of debt consolidation. Read more at her website linked above.

Are you worried about your debts?

If yes, you need to stop worrying and find out a strategic way to get rid of debts quickly. High-interest debt like credit cards can burn a hole in your pocket by its hefty monthly payments. And if you are trapped with multiple debts, your situation might be worse.

In this situation, you might be thinking about taking out a personal loan or a consolidation loan (since you are using it to consolidate debts) to pay off your existing debt with ease. A recent Bankrate study has found that debt consolidation is one of the most common reasons for people taking out personal loans in our country.

But should YOU take out a personal loan to pay off your debts?

Let’s find out.

Do you qualify for a lower interest rate? 

The worst part of a debt is its interest payments. And when you have high-interest debts, you might have to sacrifice a substantial amount of your paycheck for making monthly payments.

So, while taking out a consolidation loan, you need to find out whether or not you qualify for a lower interest rate. Personal loans are usually unsecured loans that depend on various factors like credit score, debt-to-income ratio, employment history, etc.

In most cases, you need to have a FICO score of about 670 or higher to qualify for a preferable interest rate.

So, if you have a decent credit score, you can easily opt for a personal loan with a much lower interest rate. Thereby, it will help you to save a lot of money that you would have spent on interest payments.

Are you tired of managing multiple debts?

Well, managing multiple debts can be a cumbersome task. Moreover, different debts may have different interest rates along with different terms. So, it’s quite normal to become exhausted in the due course. Besides, you might face difficulties while keeping aside money from your budget for your debt repayment too.

But if you opt for a personal loan, you won’t have to worry about managing multiple debts anymore. You just have to make single monthly payments on your consolidation loan. That means, unlike before, you will have to remember a single due date and a single amount to pay every month. Eventually, it will help you to manage your debt in a much better way.

Do you need a shorter repayment period?

Usually, personal loan repayment terms range from about 1 year to 7 years. So, you need to find out if the repayment period of the personal loan is lesser than your existing debts. If yes, you can get rid of debts faster and you can live a debt-free life ahead.

But at the same time, you need to evaluate whether or not the loan repayment term works fine with you. If the repayment period is too short, your monthly payments will be on the higher side. So, in that case, you need to find out whether you can afford the monthly payments. Otherwise, if you miss any payment, it will hurt your credit score adversely.

 

Is there any associated fee for taking out a personal loan?

You may have to pay an origination fee to your lender for taking out a personal loan. It’s the fee that your lender might charge for administration and processing costs. Usually, the origination fee ranges from about 3% to 5% of your loan amount.

So, before opting for a personal loan, check out the terms and conditions of it. And find out whether or not you have to pay the origination fee.

How will a consolidation loan affect your credit score?

Well, when you shop around for taking out a consolidation loan, the lenders usually perform a hard inquiry on your credit report. And it can drop your credit score by a few points. Besides, as you are opening a new credit account, the length of your credit history might be lowered. And it can affect your credit score adversely for a while.

However, in the long run, taking out a personal loan to pay off your debts can have a positive effect on your credit score. If you are regular in making payments for your new loan, your payment history (accounts for 35% of credit score) will be improved. And you might notice your credit score improving with time.

Secondly, if your outstanding balance amount in the new loan remains within 30% of your credit limit, your credit utilization ratio will improve. It is the ratio of the credit used to the credit available to you and it accounts for 30% of your credit score. The lower the credit utilization ratio, the higher your credit score.

So, taking out a consolidation loan can drop your credit score by a few points temporarily. But in the long run, it helps you to improve your credit score.

So, the bottom line is, taking out a personal loan to pay off debt is indeed a good idea. It helps you to consolidate your multiple debts. And if the interest rate of the personal loan is much lower than your existing debts, you can save a substantial amount too. This way, taking out a personal loan can help you to pay off debts with ease and save money as well.

However, if you don’t qualify for a lower interest rate or if you don’t want to add another debt to your life, you can find other debt consolidation options to repay debts. Because carrying debts means sacrificing your paycheck and compromising with your financial goals. So, lead a debt-free life and be happy.

 

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