Achieve Financial Freedom: Consolidate Debt through Personal Loans

Today I have an interesting post written by Erin Fiddler, a fellow blogger specializing in topics related to personal finance, so take a cup of coffee/tea/anything tasty and enjoy the reading.

Is it practical to use personal loan to consolidate debt? It depends.

Finally paying off your debt through debt consolidation is a major accomplishment. But the real financial recovery starts when you decide to never get into debt again unless you really need to.  You are now making a commitment to use your financial resources wisely every single day.

You will encounter cravings for your old lifestyle, and for new items, vacations, events or perhaps an opportunity to get into a business you don’t know about. Sometimes, an overall desire to not feel deprived of material things.

You will encounter debt triggers in the form of emergencies, people and perhaps life events that will make you want to get into debt again, after getting an instant cash loan to consolidate debt. What can you do to avoid getting into debt again?

What is debt consolidation?

A personal loan for debt consolidation is one option to dealing with debt. It can help you save money over the long term if the interest rate and fees on the new loan are lower. It can also offer a single structured installment loan payment that pays down the principle over a specific term, leaving you with one bill instead of many.

A debt consolidation loan is another term for a personal loan you get from a bank, credit union or other lender. Instead of making many payments to different creditors, you make one loan payment.

Using this personal loan for debt consolidation allows you to pay off balances on high-interest credit cards, for example. Instead, you’ll pay a fixed, monthly amount to the lender for a specific amount of time, usually two to five years.

The interest rate on the debt consolidation loan depends on your credit score. Your interest rate is unlikely to change for the life of the loan.

Should I Get a Personal Loan to Consolidate my Debt?

Reasons to consolidate debt with a personal loan vary according to your financial situation. Consolidating several bills into one personal loan can help you make sense of your budget. If you owe balances on several credit cards or have medical bills that are about to be sent to collections, borrowing a personal loan can help avoid late fees and costs caused by overlooked payments.

Here are four reasons to consolidate debt with a personal loan:

1. Save on High Interest Rates

If you’re paying double digit interest rates on credit card balances, shopping rates for a personal loan may help you find a personal loan with a lower interest rate than you’re currently paying. Paying a few bucks a month in interest may not seem like much, but it adds up the longer you carry balances on your credit cards.

2. Convert Variable Interest Rates to One Fixed Rate Loan

Personal loans typically carry fixed interest rates; there are no surprises due to rate changes that can occur on credit cards with variable rates. Factors that influence rate changes can vary between lenders, so carrying balances on variable rate credit cards makes tracking your finance charges a real headache. Please be aware that personal lines of credit typically carry variable rates as they offer a credit line that can be used over time.

3. Consolidate and Pay Off Debt for Good

How this works for you is based on your spending habits and ability to resist using your credit cards after you’ve paid off the balances with a personal loan. If you’re serious about paying off and staying out of debt, a personal loan could save the day. Here’s why. A personal loan is generally made for a specific amount with a fixed interest rate. You’ll repay your loan with fixed monthly payments according to a set payment schedule. When you repay your personal debt consolidation loan, you’ll be debt free. The Federal Trade Commission cautions consumers to limit their use of credit cards to avoid racking up revolving debt.

4. No Balance Transfer Fees

You may have transferred balances between major credit cards to save on interest only to find that transfer fees take a bite out of potential savings. Personal loan lenders may charge a loan origination fee, but it’s important to compare costs charged by personal loan lenders and credit card companies to find your best option.

Helping You Decide: Pros and Cons of Consolidating with A Personal Loan

By now you might have realized that debt consolidation can be controversial and confusing topic to talk about. Debt consolidation seems too counter-intuitive; you’re taking up a new, bigger loan to pay off your previous loans. However, if you’re in dire need of getting your loans done and you can’t think of any solution to hasten your payments, then consolidation may be your last chance.

We’ll help you decide with these pros and cons of consolidating your debt using cash loans:

Advantages of Debt Consolidation

It simplifies matters. There is no need to look at numerous statements every month and manage multiple accounts and debts. By having one single loan to worry about, it is easier to focus. The new interest rate should be lower than the majority of the debts that you had previously, and the monthly repayment should be lower.

If you were having difficulty paying all accounts on time before the consolidation and you are better able to afford the new loan repayments, it will have a positive effect on your credit rating.

It can also have some negative impact on your credit score as the will be a single, new debt with no history and your debt to credit ratio will drop. This is just in the short term and will improve over time.

Disadvantages of Debt Consolidation

The first thing to consider is that it is going to take serious financial discipline from your side. If you consolidate your debts and then start spending on those paid up accounts or opening news ones, you will be in a much worse situation than you were before. Pay the debts off, close the accounts and do not use them again or take on any new ones.

On the other hand, even though you are paying a lower interest rate and you pay less per month, if you do not pay extra into the loan, many of the debts will end up costing you a lot more over the period of the loan.

The other risk is that if you have used your house as collateral for the loan, you are putting it at risk if you are unable to repay the loan for some reason.

On the Road to Financial Freedom

Financial freedom isn’t going to happen overnight.

But if you’re able to define what financial freedom means to you, it may remove the stress of not knowing your path.

If you’re just trudging along not knowing what you are striving for, you’re going to lose focus and fall back into the same rut as always.

Remember that the first step is to own up to your mishaps. Once you recognize that there is a problem, do your best to solve it. Debt consolidation may be a difficult decision but be wise to choose between the two scenarios of having it solve through personal loans or not.

——

Erin Fiddler is an online financial consultant for a licensed money lender in Singapore. She works in financing for over 5 years and is an authority on emerging financial services. She also writes on trends in the industry such as consumer lending loans, stock investing, and retirement plans.