We have a lot of articles on our site offering advice on how to pay off your debts and become debt-free. We know that finding yourself over your head in debt eventually leads you down the road of missed payments, repossessions, and foreclosures — not to mention the endless phone calls and letters from collection agencies. The three basic steps to paying off your debts are to stop accumulating more debt, pay off high interest loans first, and put as much money as you can toward paying down your outstanding balances.
Getting out of debt, particularly consumer debt, is the cornerstone of financial freedom. It frees up cash for saving and investing. It enables us to get off the treadmill of living month-to-month. And being debt-free just feels great and we have a great way to help you pay off your debt — personal loans.
Tips When Using a Personal Loan to Pay Off Debt
Using a personal loan as a debt payoff tool is often overlooked and it may seem odd to use new debt to get out of old debt. OK, yes, there are some risks to this approach, but if used correctly personal loans can lower your interest payments and shorten the time it takes to become debt-free. Here are some tips when considering using a personal loan to pay off your outstanding debt.
1) Check the Interest Rate. Refinancing your debt at a lower interest rate is like hitting the lottery. A lower interest rate reduces the amount of interest paid and, assuming the term of the loan is the same, also reduces the monthly minimum payment. Refinancing existing debt with a lower-rate personal loan is a smart way to accelerate debt repayment. If you are able, try consolidating all of your high interest rate debt into one lump sum loan at a lower interest rate – this not only lessens the amount you will be paying in interest but it gives you just one payment to make each month. And, having one monthly payment can help when planning your budget and it prevents payments from being forgotten or missed.
2) Check the Term of the Loan. Care and planning must be taken to make sure the term of a personal loan is consistent with your budget and financial goals. If a personal loan has a shorter term than the existing debt, your monthly payments may be more than your budget and/or income can support. On the flip side, extending the term of a loan can result in more interest paid overtime. Both of these factors need to be carefully considered when you are thinking about taking out a personal loan to pay off existing debt.
3) Does the Loan Need Collateral. Typically, personal loans are a type of unsecured debt. However, there are some instances where lower interest rates can be obtained through secured loans, such as a home equity line of credit. While this is a reasonable option in some cases, it’s important to understand that failure to pay a home equity line of credit could result in the foreclosure of your home.
4) Weigh the Benefits of Consolidation. We touched on briefly the notion of consolidating your debts but the key to using personal loans as a tool to getting out of debt is achieving lower interest rates (as noted above). While this can include consolidating multiple debts into a single new loan, consolidation by itself is not beneficial. It may reduce the number of monthly payments that must be made, but if the new loan comes with a higher interest rate, the added convenience may not be worth the cost. So, if you are thinking about combining all of your debts, make sure the interest rate of the personal loan is lower than the rate of all of your other debts.
Bottom line, if you are looking for a way to pay off your debts, consider using a personal loan. But before you apply for a personal loan, it helps if you know where you stand, credit-wise, so you can look for the best rates within your credit range. Just like getting a credit card, when it comes to getting a personal loan, having a higher credit score will get you access to lower interest rates. Make sure you shop around for the best rate because if you are not lowering your overall interest rate, there is no point in going down this road in the first place.