Personal Loans for Debt Consolidation: Do’s and Don’ts
What is Personal Loan Debt Consolidation?Debt consolidation is a form of refinancing where multiple debts are combined into a new single loan with favorable payment terms. All unsecured debts including credit cards and a few types of secured debts can be consolidated. Example: Suppose you have a total of $33,000 in unsecured debt from three credit cards with different balances and loan terms. Card A has a balance of $9000 at 18% APR payable in 12 months, card B has $14000 at $10% APR payable in 18 months, and card C has $10000 at 16% APR payable in 12 months. You will be paying $825 per month for loan A, $841 per month for loan B and $907 per month for loan C. The total monthly payment for the three loans is $2573.
|Card A||Card B||Card C|
|Months to pay||12||18||12|
|Paying monthly per loan||$825||$841||$907|
|Total monthly payment (A+B+C)||$2573|
|Existing debts||Consolidation loan|
|Payoff Length||14 months (1 year and 2 months)||14 months (1 year and 2 months)|
|Upfront Cash Flow for Consolidation||$0||$-330.00|
When is a Personal Loan Debt Consolidation a Good Idea?In theory, a personal loan debt consolidation is right for you if your debt is not out of control and can be managed within five years. Taking a personal loan for debt consolidation may not be a good idea if you cannot afford to meet the monthly payments. Before you take this loan, ensure that you have a concrete payment plan. Otherwise, there is a high likelihood that you will find yourself going back to the newly balance free credit cards to fund the personal loan. You also need to observe your spending behavior to determine if it is in line with the discipline required to manage debts through a personal loan. If you feel that you will be tempted to take new loans with the balance free credit cards, then perhaps this is not the best option for you. Lastly, this option may not be a good option for you if your credit score is not in good shape.
|A personal loan for debt consolidation is a good idea if you:||A personal loan for debt consolidation is NOT a good idea if you:|
|Keep your debt under control||Think it will solve all the debt solutions|
|Have a concrete payment on how to meet the monthly payments||Hope to spend more by having more room in your budget|
|Are in control of your debt appetite||Are not in control of your spending behavior|
|Have a credit score of 760 and above||Finally will be paying higher interest rate|
How to Determine if Personal Loan Debt Consolidation is Right for youOnce you are sure of your preparedness to take a personal loan for debt consolidation, it is time to compare different plans and adopt the most viable. Here are the steps to follow;
- List all your debts on paper.
- The first step is to list all your debts on a paper. These may include credit cards,
- , auto loans, medical bills, etc. Next to each debt, write down the interest rates, the balance, and the total monthly payment.
- Determine the monthly payments for each loan. Identify the minimum monthly payments for each loan and add them together to determine the monthly totals.
- Shop around for offers and use a debt consolidation calculator to determine the most viable ones. Look for personal loans for debt consolidation offers and use a debt consolidation calculator to determine the most viable rates. Remember to take into account loan fees and other charges when comparing the costs.
|*debt 5%, loan and credit cards 9-28%||Balance||Payment|
|Car loan||$18 000||$540|
|Credit cards||$15 000||$450|
|Penalty to break debt||$5 000||$0|
|Total||$218 000||$1 950|
|*debt 3.50%, 30 years amortization||Balance||Payment|
|Car loan||Paid off||$0|
|Credit cards||Paid off||$0|
|Penalty to break debt||Paid off||$0|
The Pros and Cons of Personal Loan Debt ConsolidationPersonal loans usually come at a lower rate than credit cards and are therefore the best option when consolidating this type of debt. They also come with fixed terms enabling you to pay off your debt faster. Without the fixed terms, less disciplined borrowers are likely to stay in debt longer since they cannot bring themselves to make payments above the minimum requirement. This means that the debt will end up costing them more than they would with fixed terms. Another advantage of consolidating debt into a personal loan is that you have only had to keep track of one payment due date instead of several. Again, personal loans, you can lower your monthly payments by extending the payment period for up to three years. On the downside, debt consolidation, in general, may push you further into debt if you are not disciplined. As mentioned earlier, when you consolidate your credit card debt into a personal loan, you may be tempted to use the newly balance free cards to take another loan.
|Lower interest payment||May push undisciplined spenders further into debt|
|Clear debt faster||You might not be offered a better rate once you have a spotty credit history|
|Keep track of one payment due date only||Be aware to choose only trustful online options|
|Lower monthly payments by extending payment period|
Bottom LineTo sum up, personal loan debt consolidation is among the best debt management strategies for disciplined borrowers. However, this option is not always as rosy as it appears to be and therefore it is essential that you get all the fine details before you settle on a plan.
- Laurent Barret (2018). When A Personal Loan Makes Sense For Debt Consolidation. Moneyunder30.Com. Available at https://www.moneyunder30.com/personal-loan-debt-consolidation
- How Does Debt Consolidation Work? Consumercredit.Com. Available at https://www.consumercredit.com/how-does-debt-consolidation-work
- Debt Consolidation Calculator. Calculator.Net. Available at https://www.calculator.net/debt-consolidation-calculator.html
- (2017). Debt Consolidation Benefits. RockLoans Marketplace LLC. Available at https://www.rocketloans.com/debt-consolidation-personal-loans
- Brian Acton (2018). 5 Tips to Get Approved for a Personal Loan for Debt Consolidation. Usatoday.Com. Available at https://www.usatoday.com/story/money/personalfinance/2018/05/17/debt-consolidation-loans-tips-get-approved/609151002/
Alice was born and raised in Compton, California. Then she studied at Yuin University, the place where she became passionate about researching the thin ropes between money and meaning. She is insatiably interested in peopleâ€™s potential, wondering why some succeed and others donâ€™t. Thus, the articles on her blog explore a multitude of seemingly unconnected things: money, psychology, entrepreneurship, creativity, spirituality, philanthropy, just to name a few.