Personal Loans Good for Debt Consolidation or not?
Managing your debt can be key to managing your finances properly. Whether you have multiple small loans or a number of credit card payments, you’re forced to contend with many bills and payments on a monthly basis. This can get tiresome or even confusing over time. In such a situation, consolidating all your monthly payments into a single monthly installment by taking a Personal Loans can be a good move.
What is Debt Consolidation?
With multiple payments coming out of your account every month, keeping a tab on the different rates of interest, loan terms, or even the payment date can get complicated. But, what if you could unify all these different payments into one with a fixed interest rate, a fixed term, and a single payment date?
This is now possible with the concept of debt consolidation, which means you take a single loan that’s large enough to help pay off all your other loans. This way, you’ll only have one amount to focus on paying in time every month.
How is Debt Consolidation Useful to You?
The single biggest benefit of consolidating your debt is better financial organisation. Besides the fact that you’re making your financial situation clearer with a single payment, interest rate, and due date, you may also end up paying a lower overall interest with the right financial facility.
Personal loans can be the best option when it boils down to managing your finances better. In fact, most banks would even encourage you to take a personal loan so you can consolidate your debt. Here’s why taking a personal loan for debt consolidation can be a good move:
- Keep things simple
Having a mountain of debt to pay off can be stressful on its own. When you’re dealing with a number of bill payments – credit cards, loans, hire purchases – it can get very difficult for you to keep track of each amount, the interest rate, and the due date. With a personal loan, you’ll be able to pay off all these small debts and be left to deal with just one payment.
- Avoid missed payments
There’s always the danger of missed payments when you’ve got to deal with a lot of dates and numbers. When you consolidate your debt with a personal loan, you only have to worry about paying your personal loan amount every month.
- Saving money is a possibility
While better financial organisation is beneficial for you in every way, there’s nothing better than saving money on repaying your debt. To know if saving money is a possibility, you need to figure what you owe when it comes to each individual financial product. Once you calculate the interest you’ll pay for each product, sum it up and compare it with the interest payable for a single personal loan that you’ll use to consolidate your debt. If the overall interest payable for the personal loan is lower than the existing interest you’re paying, then it makes more sense for you to go ahead with this financial move.
While taking a personal loan for debt consolidation may seem like a great idea in most cases, there are times when such a move can spell financial trouble. Here are some situations when debt consolidation with a personal loan is just not a good idea:
- Debt is within manageable levels
Any kind of debt is said to be in manageable territory if you’re able to pay off this debt within a year. So, if you’ve only got a couple of financial products and the overall amount you owe on them is something that you can pay off in less than a year, taking a personal loan on top of it will only serve to add to your financial woes.
- Never add to your debt
A debt consolidation move only makes sense when you’re riddled with multiple debts that you wish to manage and reduce one way or another. So, when you’re in debt, carrying on with your usual expenses just isn’t good. Firstly, you need to cut off all your unnecessary spends. Secondly, you need to buy better and manage your money efficiently so you don’t overpay for anything. In short, debt consolidation is completely useless when you’re ignorant or choose to ignore proper debt management.
- Higher overall interest
As mentioned earlier, debt consolidation is a great move when you’re saving money along with organising your finances. But, the whole idea of debt consolidation can be useless if you’re going to pay a higher overall interest compared to what you’re paying now. This is possible, especially when you’re dealing with credit card debt. Credit cards have a fixed interest rate whereas personal loans have a flat interest rate. Unlike fixed interest, flat interest is calculated using the principal amount. So, there’s every chance that you end up with a higher interest when you take a personal loan for debt consolidation. To avoid such a situation, remember to always multiple the flat rate by 1.8-1.9x and compare it with the fixed rate to get a good idea of the overall interest that’s payable.
Before you go ahead and apply for a personal loan, remember that it’s highly important for you to know the size of all your loans, the repayment term as well as the amount for each loan. Now, compare your total debt with your monthly income so you can ascertain your current financial situation. This way, you’ll be in a much better position when you need to shop around for the best deals in terms of interest rate, repayment term, offers, and conditions.
Do keep in mind that consolidating your debt is just a way for you to streamline your finances and manage your debt better. At no point will your overall debt reduce unless you pay a lower interest.
-25 November 2018 | Microstat.in