Is a Personal Loan a Good Choice for Paying Off Debt?

When it comes to paying off debts, a lot of people are turning to personal loans. This is due to how easy it is for some people to get these types of loans, plus the ways that it can benefit credit when used properly. However, most people do not research ahead of time to figure out if this method of paying off debt is what’s best for their situation. Here are some ways to decide if a personal loan is the right way to pay off your debt.

The Interest Rate

If the debt you are trying to pay off has a higher interest rate than the personal loan you are applying for, it can be a very good choice. The savings in interest can then be applied as extra principle each month, helping you pay down the personal loan even faster. For example, if your current debt is costing you $500 a month, but with a personal loan it only costs you $400 each month, you can apply the extra $100 toward the principle of the loan and get your debt paid off a few months early. Just make sure there is no prepayment penalty that could end up costing you a fee in the end.

The Type of Debt

One of the biggest reasons that paying off debt with a personal loan is considered a good thing is because it changes the type of debt you are paying. Revolving debt, which is what your credit card debt is, can harm your credit a lot more than an installment loan can. Since most personal loans are installment loans, this can be a big boost to your credit. The lower revolving debt you have, the better your overall credit report will look. Plus, if you have only utilized a small percentage of the total credit that’s been extended to you, this will boost how your credit report looks as well. Now, if you are paying off another loan, you will not be changing up the type of debt you have, and you will end up doing more harm to your credit report than good.

Stop Using Credit Cards

If you pay off credit card debt, the one thing you have to make sure you do, or rather don’t do, is use the credit cards again until the personal loan is paid off. For those who end up paying off their credit cards with a personal loan, only to add to the credit card debt once more, will end up in a worse off financial situation than they started in, and their credit will suffer for it. Pay off the credit card and then put it somewhere safe until the personal loan is paid in full. Once the loan is paid off, use your credit cards carefully. Since you have been living without credit cards for a while anyway, you should be able to go without using them unless it is absolutely necessary.

It’s not often recommended to take out a line of credit to pay off another line of credit, but there are times when the scenario can work in your favor. If you are able to change the type of debt you have to improve your credit report, it could work to your benefit. Just make sure you understand what the differences will be before looking into personal loans as a viable option. Don’t take out one loan to pay off another line of credit, and then rack up more debt, or the situation you have been trying to get out of will only end up worse. Taking the time to fix up your credit is worth it when down the line, you are able to get the credit you need and not have to worry about the struggle to pay down the hefty balances.

 

loans - 18 Oct, 2013 - No Comments