It is very rare when taking more debt or loan to pay off existing liabilities (such as credit card debt) makes sense. Using a personal loan to pay off your credit card debt is just like moving the money around, but the debt is still there. It is considered as moving the money you owe the bank from one pile to another. You will just end up getting another pile of debt with better terms for you and your family.
These are the three situations when it might make sense to take out a personal loan to cover your credit card debt:
- Lower your Interest Rates
The most imperative aspect of a debt consolidation loan is to lower the annual interest rate of your outstanding amount. Often, taking a personal loan can be the perfect for you to lower the annual interest rates. You should not consider a personal loan to cover your credit card debts if it doesn’t lower the annual interest rate which you are paying by now. When you pay a lower interest rate, it will allow you to pay off more principal every month, which in turn will help you in getting out of debt faster, and ultimately lower the total cost of your debt.
- Unify your payments into one
Unifying several credit card payments into one loan is a big achievement and having that one loan payment will allow you focus all your attention, time and money into that one payment as it is much easier to concentrate on paying off one debt instead of many other smaller debts that always seem to nip at your heels.
Once you done consolidating your credit card debt with personal loan, you must keep a watch on your credit card balances and should avoid racking it up. It would not do much good, if you focus on one large debt and start accumulating smaller balances again on your credit cards.
It is advisable for you to avoid playing a shell game with your debts. Consider the underlying, basic reason why you are in debt. Whether you spend more or you don’t stick with your family’s monthly budget, solve such issues in order to get out of your debt and stay out of your debt.
- Lower your monthly payments
If you use a personal loan to consolidate your debts then it may also lower your total monthly payments for the debts you owe. You may have to run the numbers, but often you will notice that your monthly minimum payment for your personal loan is lower than the sum of all your separate credit card minimum monthly payments.
When you lower your monthly payments, it can help you in creating a debt snowball and would help you to cover your credit card and now personal loan debt faster. For instance, if you were at first paying Rs.30,000 per month in minimum payments to the credit card companies and now started paying only Rs.26,000 per month for your new personal loan, then now you can pay for the other Rs.4,000 per month directly to your loan’s principal. This approach will help you in getting out of a debt faster.
If you are not saving much by rearranging your credit card debts using a personal loan, either by cutting down your monthly payments or lowering your interest rates, it is possibly not a good idea to restructure your debt. Make moving your debt around valuable to you. Try insisting on a lower interest rate for your debt and lowering your monthly payment so you can pay your debt faster, also take control over your finances with one lower monthly payment.
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