A personal loan can help you consolidate high-interest debt into one lower-interest payment with a longer repayment period. Since most personal loans usually have relatively low interest rates compared to credit cards, they are used frequently to consolidate several high-interest credit card debts into a single lower-interest monthly payment. They are sometimes used as a sort of credit advance, allowing individuals to take out money against their future salary, which they could use immediately for whatever purpose they saw fit.
A personal loan works like this: You apply for the funds, and the lender holds your payments until you have fully repaid them. Once you have paid off your debt, you generally have an introductory period, during which time your payments are very low-rate and easy to repay. Then, after your introductory period is up, your interest rate will rise dramatically, and you will have to start paying back the full amount every month. Some lenders provide additional services, such as allowing you to roll over the balance of your personal loan into another account, lowering your interest rate, or even taking the money itself out of your bank account. This allows you to repay your debt more quickly, or in some cases, spread the costs over several years.
However, it’s important to remember that a personal loan isn’t quite as attractive as a credit card debt, in terms of what you repay each month. A personal loan comes with a lot more interest fees than a credit card debt, and the actual amount that you borrow will vary depending on how much you borrow and how long you plan to repay it. For example, if you borrow $1000 and plan to repay it over five years, you’ll end up with a thousand dollars in interest charges, plus any applicable finance fees and tax. If you borrow just ten thousand dollars and plan to repay it over fifteen years, you’ll end up with just fifty thousand dollars in interest charges and no finance fees. So although your monthly repayments will be lower, you’ll still owe a lot more money in total once the term of the loan expires.
In fact, the biggest advantage of consolidating high-interest debts with personal loans is the benefit of lower interest rates and longer repayment periods. Consolidating can lower your monthly repayments substantially, to the point where you’re still able to make your big purchase, but at a much lower interest rate. Because you have longer to pay on your personal loan, you can spread the cost of the big purchase out over a longer period of time, resulting in savings. You can use this extra cash to pay off other debts or save for retirement, whatever you wish.
And when you’re thinking about borrowing to cover a major purchase like a house or a vehicle, you can get really serious about consolidation. If you already have a decent personal loan repayment history and are committed to sticking to the repayments, you might want to opt for a secured personal loan, which means that your house or car will be at risk if you can’t keep up the repayments. Conversely, unsecured personal loans can give you a higher amount of borrowing power; however, this borrowing will come at a higher interest rate. You’ll be well placed to choose the type of personal loan that’s right for your financial situation and financial goals.
Finally, when you’re ready to apply for a personal loan, one of the most important factors in the application process is your credit report. As mentioned above, your credit report is of critical importance in determining whether you receive an approval for the personal loan. So it’s always a good idea to check your credit report ahead of time to ensure that it doesn’t contain any mistakes – there’s nothing worse than applying for a personal loan only to find that you’ve got negative marks on your credit report. There are many companies that specialise in credit repair and even some that offer credit monitoring services that will alert you to any changes to your credit report. If you’re having difficulty making payments on time, you may wish to investigate these services and see if they might help.