Should I pay off my debt with a personal loan?
11 AUGUST 2023
Debt can often feel like an overwhelming weight on your shoulders. However, there are ways available to help manage your debt responsibilities. Taking out a personal loan to consolidate debt repayments may be the solution for you.
Paying off your debts with another loan may seem like a bad idea, as it leads to more credit. Although it can be key to allow you to conveniently consolidate multiple outstanding debt payments into one monthly payment.
A personal loan can be used to pay back your debt in this way by saving money and making it easier to manage your finances. Before you decide to consolidate your debt using a personal loan, consider its advantages and disadvantages.
- All your debt payments from multiple credit lines like credit cards, payday loans, overdrafts, etc., are collated into one monthly payment to one single lender.
- Debt consolidation is able to offer a lower amount of interest.
- A lower interest rate means that you can pay your debts off faster, in one payment.
- Monthly installments are fixed, so that budgeting is easier.
- The loan repayment period is as long as you need it to be, according to how much your repayment amount is.
- Keeping on time with your payments each month can help improve your credit score.
- Your credit score needs to be in good standing as it will affect the interest rates that you are offered.
- The monthly payments you agree to could be higher than before due to the interest rate you are offered.
- Missing a fixed payment can negatively affect your credit score.
- A longer loan term could mean more interest paid.
- An early repayment charge is applied to your existing debts if you want to pay them off earlier using a personal loan.
Is this the best decision for me?
Before you decide to use a personal loan to pay off existing debts, you need to consider a few factors to determine if it is the best choice for you. Assess why and if you need to consolidate your debts. This decision is affected by the credit agreements of your existing debts in terms of early repayment charges. Determine how much you would need to borrow to repay your debts, taking into account the overall cost of the loan needed and if you are financially able to take another loan out.
After a few calculations to find out the above, if you find you’ll pay more for a personal loan than leaving your debts as they are then consolidating your loans may not be a good idea. Whatever your decision, be sure to keep a good credit score so that you’re eligible for lower interest rates.
In what order should I pay off my debts?
There are many strategies that you could use to find the best way to pay off your debts smarter. Depending on your particular situation and financial circumstance, you could pay your debts off by balance, by interest rate, or by the credit limit.
- By balance: Order your debts by balance, with the lowest balance first. Then pay off all your debts in that order with minimal payment amounts, besides the debt with the highest balance. Pay this debt off with the highest payment amount you can.
- By interest rate: Ordered by the highest to lowest interest rate, pay your debts off with the largest payment going towards the debt with the lowest interest rate.
- By credit limit: Ordered your debts by how close you are to the credit limit. This means that credit cards will be on top of the list and paid off first.
Consolidating debt can be done in many ways and it’s important to choose the path that is best suited for you and your goals. Speak to a financial advisor if you need help with making this crucial decision. Remember, no matter what you decide, stick to the plan and you’ll be able to make the most of any situation.