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Personal loans are a popular way to borrow money for a wide range of reasons. Although I'm usually not a fan of extra debt without a very good reason, in some cases, a new personal loan can help you get out of your debt.
Consolidating credit cards or other high interest rate debt with a single lower interest rate personal loan can help you save money in different ways. Between lower interest rates and a faster return on investment period, you could end up saving a bundle.
A personal loan may be suitable if one or more of the following situations apply:
1. You can get a lower interest rate
The most important rule to follow when consolidating or refinancing a debt, even a student loan, is: consolidate only if you can move your balance at a lower interest rate. Moving to a higher interest rate will cost you more in the long run, not less.
You can consider a rate of interest as a cost per dollar borrowed per year. If you have $ 1 on a 20% APR credit card, you will pay 20 cents a year for every dollar on this card. A loan above 20% means you will pay more. Below 20%, you will pay less. That's the case, no matter the balance.
Most personal loan interest rates are based on a combination of market interest rates and your personal credit history. If you have good credit, you can use it to pay your debts at the lowest possible cost.
2. Want to make less monthly payments
If you have half a dozen credit card payments due each month, it's easy to miss a due date or make another senseless mistake. A late or missing payment can result in a reduction in your credit score up to seven years. You must always strive to pay at least the minimum payment by the due date each month.
When you consolidate your debts, you will get a payment instead of several. Depending on the debts you are consolidating, your new monthly payment may be lower than your old monthly payments combined.
3. You want to create a deadline for debt freedom
If you have a credit card debt, reaching a zero balance is not always as clear as with other debts. Installment loans, for example, come with a fixed number of payments and lead to a zero balance with the final payment. Credit cards allow you to continue to increase your balance. If you spend more than you can pay in full each month, you are headed in the wrong direction.
Popular personal lenders offer fixed and flexible terms. If you can convert a credit card debt into an installment loan balance, you will know exactly when your balance will be repaid.
When I was working as a bank manager, I helped some clients consolidate several debts into one loan in a single monthly installment. By settling credit card debt and converting it into loans with terms of three or five years, the freedom of debt could be on the horizon.
Smart credit decisions eliminate your debt
When you pay interest on a credit card, you get nothing in return. Unlike mortgage debt, which gives you a home, credit card debt is probably due to an badortment of past purchases. Adopting good spending and budgeting habits can help you avoid future debts while paying off your current debts.
Between credit cards, student loans, car loans, mortgages or rents and other monthly bills, managing your money can seem like more of a juggling act than anything else. Making smart money decisions with a long-term goal is the best way to financial success. If consolidation can save you money while helping you reach your long-term goals, feel free to make this application today.
Ready to consolidate your debts with a personal loan? Consider these offers from our partners:
Personal Finance Insider offers tools and calculators to help you make informed decisions with your money. We do not give investment advice or encourage you to buy or sell stocks or other financial products. What you decide to do with your money depends on you. If you act according to one of the recommendations listed in the calculator, we get a small share of the revenue from our trading partners.
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