Debt is an intimidating circumstance. With people in the U.S. reaching a combined credit card debt of more than $1 trillion in 2017, it can feel nearly impossible to escape money’s grip, especially since that number continues to increase. This financial weight has led thousands of people to consolidate their debts in an attempt to get instant debt relief. While this method works for some, it may not be the best way to get out of debt for everyone. If you are trying to figure out your next steps and think a personal loan may be the best way to go out of the available debt solutions, take the following factors into consideration first.
Paying a Debt with More Debt Should Have Explicit Benefits
In the end, taking out a personal loan to pay off other loans or credit cards is just using debt to forego debt. You do not truly get debt relief this way, at least, not immediately. However, there are times when consolidating your payments into a single form of credit may be beneficial. As an example, let’s say that you owe about $3,000 in debt on one credit card with 21 percent interest, $5,000 on another card with 18 percent interest and have a $10,000 private loan with 15 percent interest.
If you are wanting to repay each of those debts within 10 years, you are facing more than $19,000 in interest charges alone, and that is assuming you make your payments on time and don’t have to extend the life of your loan. In this case — which is a relatively common scenario for people — it would definitely be worth it to take out a single loan for the exact amount owed with no higher than a 12 percent interest rate for five years.
The monthly payments will likely be higher than what you were originally paying for the credit cards and loans separately, but going this route could save you thousands of dollars. If you can afford it, you would benefit even more by getting a personal loan with lower interest, but regardless, it is crucial to do the interest math on any credit card or loan before signing on. Interest charges are no joke and are a sure way to end up in even more debt while trying to consolidate what you already owe. Plus, if you have trouble paying on time, this could only add more issues in terms of late fees.
Loan Consolidation Should be a Last-Ditch Effort
In the example above, a consumer in that kind of situation has a relatively moderate amount of debt and probably has an average credit score. If you have more than $50,000 in debt, however, taking out a personal loan may not be the best way to get out of debt, especially if that debt is spread over multiple accounts. Using a personal loan to straighten your finances is worthwhile only if it can help you pay off your debts within the next five years or so, as that is a great amount of time to improve your credit score and save tons of money on interest charges. Like many people, getting debt relief in that amount of time is simply not a visible solution.
A good question to ask yourself before consolidating your debt into a personal loan is “Will this loan allow me to pay off all my debt within five years?” If the answer is no, then you should look into other options and speak with a legitimate debt relief company, such as Liberty Debt Relief, to discuss better options.
Changing Your Habits, Not Your Bank Account, is Your Saving Grace
When all is said and done, the only way to truly get out of debt is to change your spending habits and create a better and more sustainable financial plan. If you are simply looking for an easy way out of your financial burdens and have not changed your spending habits or budgeted properly, then taking out a personal loan to consolidate your debts could likely lead you to accrue more debt. Signing a new loan does not make the other ones go away, and, in order for debt consolidation to work effectively, you have to make the full payments every month.
Unlike credit cards, there is no minimum payment option, and prolonging the life of your loan can seriously lower your credit score while increasing your total interest paid. If, on the other hand, you have come up with a solid financial plan to get debt relief and are confident in your ability to manage spending, then taking out a personal loan to pay off your debt could very well help.
The climb to get out of debt is a trek that millions of people face every day, and it can take years to finally get out of the rut. Luckily, there is plenty of research and information available to find the solution that works best for you and your particular situation. If you are looking to get out of debt within the next five years or so, consider working with us at Liberty Debt Relief. We may even be able to work with your creditors to settle your debt for a lower, more manageable amount! Contact us today!
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