Nobody likes being in debt or accumulating debt over a period. However, people often find themselves in a situation where their finances have gone out of control, and they have a mountain of debt that they must pay off. These situations are getting increasingly common, and it is always better to consider your options when you have a financial crisis. One of the best options available to people with debt is choosing debt consolidation to get out of debt.
It is essentially a personal loan that individuals can use for paying off high-interest debts, such as credit card debts. When you consolidate debt, you can pay off your credit card balances in full and have a simplified repayment plan. It could help you save you time and money, depending on the loan’s terms and how much debt you have. However, you must consider your financial goals and situation 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’re using them for debt consolidation, here are the instances where it may work for you:
· You have an excellent credit score
People can acquire personal loans with any credit score, but if you want lower interest rates and favourable terms, Harris and Partners advise that you should have an excellent credit score, which should be above 670.
· Your debt is high-interest
The average interest rate for personal loans is 9.41%, but the average interest rate for credit card debt is 16%. That is a significant difference, and people who can qualify for lower rates than what they’re paying already should consider debt consolidation loans to save money in the long run.
· You have a plan for repayment
One of the worst things about credit card debt is that it is constantly revolving, which means you borrow and pay the funds on an ongoing basis, but there isn’t a repayment plan. If you’re using your credit card and only paying the minimum every month, you could find yourself paying off your debt forever. However, personal loans have a repayment plan, which makes them an excellent option if you can stick to it because it helps you get out of debt quickly.
When shouldn’t you consider a debt consolidation loan?
Even though you will benefit from clear benefits if you get a debt consolidation loan, there are instances where it may 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 beneficial because it means you can use the credit available on your credit card. However, once you have transferred the debt and then continue racking debt on the card you have paid off recently, your financial situation could worsen. Therefore, you must address your spending issues before you acquire 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. That will increase their costs and sometimes make the monthly payments hard to pay off, which would defeat the purpose of getting a loan in the first place.
· You only have a small debt amount
If you think you can quickly pay off your existing credit card debt in the next six months to a year, then the savings you would gain from a debt consolidation loan won’t be beneficial for you. You don’t need to take out a personal loan when you can afford your monthly credit card payments easily.