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Why You Should Consider a Personal Loan for Debt Consolidation
How much do you spend in minimum payments every month on your debt? How much do the balances on those cards and loans change after those payments? Credit card debt can last a long time because the minimum payments you’re making every month are doing very little to actually attack the balance of the loan. You are paying primarily interest which makes it hard to get ahead.
If you are stuck in the cycle of minimum payments and credit card debt that seems to be going nowhere fast, it might be time to consider a personal loan for debt consolidation. Here are a few things to think about as you determine if a personal loan for debt consolidation is the right step for you.
1. You can arrange an unsecured personal loan to avoid putting your property at risk.
Some loans are tied to things you own like your car or your home. If you are worried about tying your debt consolidation to the home you’re living in, you don’t have to opt for a secured loan. There are many lenders who will consider unsecured personel loans for debt consolidation purposes.
RELATED: What is an Unsecured Loan?
2. A personal loan for debt consolidation can pay off all of your credit cards at once.
Add up the balances on your various credit cards. How much do you owe all together? (This might be eye opening if you’ve never actually totaled up your debt before.) In most cases, you can take out a personal loan that covers the full amount you owe on your cards. Owe $25,000 on everything? Get a loan for $25,000. You can have everything cleared off in short order if you decide to use a personal loan.
3. You might be able pay less every month for your debt.
If you had four credit cards with four minimum payments, you might be paying over $600 per month in credit card payments. A personal loan for debt consolidation will pay off those four cards and give you a single payment every month that may be considerably less than the $600 you’ve been paying.
If your budget has been at the point of bursting every month as you tried to cover your minimum payments, this might be the opportunity to bring yourself some breathing room while still taking care of your obligations.
4. You will pay off your debt in much less time.
If you make the minimum payments on a credit card you can be working on that card for well over five years. In some cases you may be working on that card for closer to a decade – and that’s assuming you don’t use the card for any additional purchases. Since credit cards are revolving debt, it’s hard to get ahead on the balance because interest is high on previous purchases and you may still be using the card to make new purchases.
A personal loan for debt consolidation clears off your old credit cards and gives you a single loan to cover all of the debt. That loan will come with fixed payments, much like car payments, that you will make every month. When you arrange your personal loan, you will likely have a choice of terms including the length of the loan. You can arrange to pay off your debt in 24 months, 36 months, 48 months or more depending on your needs and your budget.
RELATED: Why Paying the Minimum Monthly Payments Are a Bad Idea
5. You can improve your credit score.
Showing that you are managing your debt obligation in a good way will help boost your credit score. Paying off revolving debt is a plus in the world of credit scores. So is making timely payments on debt. So is reducing the amount of debt you have overall. That means you may see a jump in your score immediately after using a personal loan for debt consolidation, and you will likely see your score continue to improve over time as you manage you continue to pay off that loan.
RELATED: How to Improve Your Credit Score
Tips for using a personal loan for debt consolidation
There are a few things you will want to consider if you plan to use a personal loan for debt consolidation.
- Don’t use your credit cards after you pay them off with the personal loan. If you clear off your credit cards and immediately use them again you will wind up with twice as much debt – the original debt you are paying off with the personal loan and new balances on the cards you had just cleared off.
- Pay more to clear your debt quickly. If you need room in your budget to be sure you’re making bill payments on time, a personal loan can reduce your overall debt payments. But if you have room in your budget to pay slightly more every month, consider reducing the terms of your loan so that you clear your debt in 36 months instead of 48 or 48 instead of 60. This will reduce the amount of interest you’ll pay over time and often help you get more favorable terms for the personal loan.