Debt Consolidation Using A Personal Loan

Debt Consolidation Using A Personal LoanDebt consolidation is a reliable and trusted repayment program that is meant to give you the help that you need. This is because there are a lot of times where your payment problems often start because you simply have too many payments. Even if you have the resources to meet and pay all of them, the sheer number of details to track can cause problems.

This where the need to consolidate debts was born out of. It gives you the ability to combine your payments under one account giving you the freedom and flexibility that you need. As you do this, you are able to manage your repayments better and lower the risk of defaulting on your loans and debt.

This is a welcome benefit especially as consumers are starting to fall in love all over again with their credit cards. According to Federalreserve.gov, the revolving consumer credit loans in 2016 topped one trillion dollars. This has been on a steady rise dating back from the most recent 2008 recession.

As most consumers start to pile on debt especially with their plastic credit, debt consolidation is proving to be a great equalizer in paying off financial obligations. One way of doing it is by taking out a personal loan to cover all existing payments. You simply get a loan, pay off all your existing debt obligations and you only pay one amount every month.

If you are considering this repayment program, here are a few pros and cons of debt consolidation with a personal loan that you need to read up on.

Pros of using a personal loan in debt consolidation

Sounds simple enough right? You take out one big loan enough to cover for all your smaller debt payments. Here are some of the benefits that you can expect in doing that.

You pay off everything

There is no doubt that this is one way to pay off debts fast. You are able to close the books on some of your financial obligations. As earlier mentioned, the process is simple enough to understand. You take out one big loan from a lender, you use the money to pay off everything. And then you simply make payments to that particular creditor.

You save money from high-interest loans

One of the best things to come out of debt consolidation is being able to save money by paying off high-interest loans. There is no doubt that as you make payments on a loan with a high-interest rate, you end up paying a sizable sum of money towards interest at the end of the loan. Once you are able to pay it off sooner, the less you end up paying in interest.

You get to work with a few payment details

It is also good to know that once you take on debt consolidation, you significantly reduce the number of payment details you have to keep tabs on. If you had five different debt obligations, that means five sets of everything. Five different payment amounts, changing payment due dates, and even interest rates.

After you combine your payments under one account, all those details are gone and you get to focus on just one set of information. One payment due date so you don’t miss a payment, one payment amount so you do not get confused, as well as one interest rate to think about.

Cons of using a personal loan in debt consolidation

Now that you have an idea on the benefits of using a personal loan to condense your financial obligations, here are some things to look out for.

You fall into a false sense of financial security

Financial freedom is attainable with a lot of hard work and commitment to make the right choices. However, there are some consumers who believe that once they consolidate their financial debt, they are now free of those obligations. Sadly, this is not the case and this belief can lead to dire consequences. There are a number of people that falls into this trap simply because they see that their debts are paid off. If this is you, you simply need to look at that personal loan you just took out. This can remind you where your debt obligations went.

It is challenging to secure a low-interest loan

If you have been having a hard time keeping up with your payments for the past few months, there is a good chance that your credit score has already been affected. Though the average credit score in the country is still considered to be in the “prime” according to Valuepenguin.com, missed payments can quickly change that.

Here is a video on average credit scores for consumers:

If this is the case, you might have a hard time qualifying for a personal loan that is large enough to cover all your existing loans. If you do qualify for the loan, you run the risk being slapped a high-interest rate. This is how lenders cover the risk that they are taking when they lend money to consumers with low scores.

What to watch out for

As you have seen both sides of the argument, it would benefit you to know some of the things to watch out for when consolidating your debts with a personal loan.

Pay off your debt accounts immediately

One of the things you need to remember in debt consolidation is that you need to instantly pay off your debt obligations once the loan is released. This lowers the risk where you might end up using the money elsewhere. It is also important to take note that you should watch what you borrow. Loan only what you need and nothing more. This helps you manage better the repayment amount after.

Be sure to stay on top of your payments

The last thing you need when you enter into a debt consolidation program is missing payments. Much like how it is with your previous lenders, missed payments can lead to fees, penalties, and other charges. These can drastically increase the payment amount you have to send out to your lender. Not to mention that it can quickly negate whatever savings you get either from a low rate or longer repayment period.

One way you can do this is to consider an automatic payment to come out of your account. This lessens the chances of missing a due date and you only have to make sure that there are enough funds in the account to cover the payment.

Do not add on to your debt

This is one of the most important things you need to remember when choosing to use debt consolidation. As you combine your payments under one account, the balances on your other credit tools are wiped clean. You might be tempted to swipe that card again because there is a sale at the mall.

You need to make sure that you stick to your repayment without adding on more debt. This is because as you increase your payment amount, you are slowly digging yourself into an even deeper financial hole. You are topping up on your debt payments and sooner or later, you would find it difficult to meet your financial obligations.

Debt consolidation using a personal loan is a viable option to manage your repayment on multiple debt obligations. There are benefits as well as risks that you will be taking on as you choose this option. It is best to have a clear understanding of what the program is all about to help you make better as well as informed financial decisions.