Most of us have to deal with debt throughout our lives, and it’s easy to let our obligations get the better of us if we aren’t careful about how we manage unavoidable requirements like monthly repayments.
Driving down the cost of debt is possible if you consolidate several separate loans from different sources under a single package. But should you do this with an all-purpose personal loan, or choose a specific debt consolidation product for his purpose?
Understanding confusing terminology
The first thing to note is that for the most part, personal loans and debt consolidation loans are one and the same.
Part of the reason for this is that you’ll need to take charge of paying off the different debts you owe to other providers when you take out a loan of this kind, and so in theory you could choose not to do this and simply spend the cash however you see fit. Obviously this would only end up leaving you in a worse position, and will hurt your credit score as well.
Acquiring a personal loan
It’s important to remember that when applying for a personal loan, your lender will probably require you to indicate what you intend to use the money for.
If debt consolidation is your aim, don’t be shy about stating this. It shouldn’t hurt your chances of getting approved, because in reality things like your credit history will hold more sway over this. In fact, if you want to consolidate your existing debts under a single loan, then some lenders might be even more amenable to taking you on as a customer.
Checking rates carefully
The main reason that you’d want to consolidate your debts with a personal loan is so that your monthly repayments are brought down to size. Interest rates are what impact loan affordability, so if your new loan doesn’t have a lower rate of interest than the other finance products you’re already responsible for repaying, making a switch won’t save you any money.
It’s important to scrutinize rates whether you’re looking into debt consolidation, renewing your mortgage, financing a vehicle purchase or switching credit cards. If the figures don’t add up in your favor, then compare offers from other providers.
Looking at repayment terms
Another influential aspect of a personal loan which will determine its suitability for debt consolidation is the amount of time over which your repayments will take place.
Generally speaking a personal loan will have a duration of between 12 months and 5 years. The longer you stretch it out for, the more you’ll repay in interest. On the flip side, longer-lasting arrangements also mean lower monthly repayments, so it’s a balance you’ll have to strike based on your household budget.
Altering your spending habits
Speaking of budgets, you should take stock of your spending habits and make changes to avoid lurching back into unsustainable levels of debt if you do decide to consolidate what you currently owe under a personal loan.
Just because you have suddenly unburdened yourself of a complex web of loans and credit agreements, it’s not a good idea to be profligate once more. Having to turn to debt consolidation should be a sign that you are living beyond your means, and that bad financial habits have to be knocked on the head right now.
The bottom line regarding debt consolidation is that a personal loan can fulfill this purpose perfectly, so long as you choose your lender carefully and use the money you receive responsibly.
You should also check with the other credit providers to ensure that there are no early repayment charges to deal with if you clear your slate of debt with them sooner rather than later.