A personal loan is ideal for paying off bills, house rent, buying a new vehicle or a house. However, another widely popular reason to take personal loans is to clear all other debts.
Using your credit card to pay debts compels you to repay in the form of high-interest monthly amounts. Therefore, you can save more with better financially feasible methods like using a personal loan for the same purpose.
Additionally, personal loans also allow you to consolidate your debts into a single monthly payment at a reduced rate.
While choosing this option has its benefits, it is important that you choose a loan that offers lower interest rates to help you save on interest money. Money View provides affordable personal loans up to 5 Lakhs at an interest rate of 1.33% per month and 16% annually.
The following sections will guide you through:
- Why debt consolidation is a good idea
- The right time to use a personal loan for waiving credit card debts
- Things to consider for consolidating debt with a personal loan
- Tips for comparing online lenders
Why is debt consolidation a good idea?
If you are in knee-deep debt, you may want to consider a debt consolidation strategy. You can opt to combine individual debts into one larger loan that includes credit card balances, auto loans, student loans, medical debt, and others.
Your credit score gets impacted by the number of times you avail of credit and the extent of credit that you are taking. Hence, ensure that your total balance is below 30% of your total credit limit – the lower it is, the better.
With credit cards, it’s also essential to make payments on time and pay off what you owe. It will reduce your credit utilization ratio, one of the most critical factors in your credit score.
Personal loans might be an installment debt with an origination fee, but they still carry lower interest rates than credit cards. Lenders like Money View charge a processing fee of 2% of the approved loan, but the approval takes only 24 hours while applying through the Money View app.
On the contrary, credit cards are revolving debts, allowing you to maintain a balance on your credit card as long as you pay smaller monthly payments as required. However, they also charge late fees, annual fees, and higher interest rates than most personal loans.
The right time to use a personal loan to waive off other debts
If you have moderate debt and can pay it off in the next six months to even five years, a personal loan might prove a safe option. While people often take loans to pay off longer debts, some lenders like Money View offer flexible repayment options from three to sixty months.
When you refinance or consolidate debt, your goal is always to make repayment more affordable, with more options than just a lower Annual Percentage Rate (APR). You can choose to pay off your debts faster by paying them back over a shorter period and making higher monthly payments.
However, if you’re not trying to pay your debts off quickly, you can choose to make smaller monthly payments to pay less interest.
When you take out a loan, there’s a risk that your interest rate will change. It may vary with the prime rate or other financial indexes. If the index rate goes up, your interest rate will too. A fixed-rate consolidation loan can help by locking in your interest rate that guarantees the exact amount of monthly payment.
Things to keep in mind for consolidating debts with a personal loan
Before taking out a personal loan to pay off your credit card debt:
- Make sure it’s the right decision.
- Do your research if monthly fixed payments fit your budget and you want to use a personal loan.
- Be aware of what a personal loan entails and consider all your borrowing options before settling on this particular one.
Online lenders like Money View are great for easy access, but it’s better to think if its benefits outweigh the drawbacks.
The following are some things to keep in mind:
Managing new debt
Even with a new personal loan, you are in debt and need to pay off your new loan while maintaining your credit. You can avoid going deeper into debt by not spending on a credit card with a zero balance. Hence, it’s better not to close the card after paying it off, as it can negatively affect your credit.
Checking your credit score
When considering refinance or consolidation, check your credit score. Seeing your credit history and checking for errors could boost your score and make the process go more smoothly. Add up your credit card balances to see how much money you’d be using to pay off your debt.
Calculating your EMIs
With a personal loan, the borrower needs to repay the amount with EMIs. EMIs are the amount that you need to pay throughout the repayment period. The amount is fixed or variable, based on the sum borrowed and interest rate.
The borrower’s credit score significantly impacts both the length of the repayment period and the interest rate. Many online lenders like Money View also offer the service of calculating EMIs through an EMI calculator.
Researching online lenders
Looking at the terms and fees of each potential lender will make it easier to find a lender that suits you. To see rates without affecting your credit, try looking at their website. If a lender seems like a good fit, start building a complete application.
Tips for comparing online personal loan lenders
Think about it this way: by prequalifying with multiple lenders, you’re not harming your credit at all. They will perform a soft credit check without negatively impacting your credit score. However, they can show you an estimate of the APR and repayment terms to help you make smarter decisions.
Other things to consider are:
Processing fee, prepayment penalty, and late fee
When getting a personal loan, some lenders charge a processing fee, and they might also charge a late fee if you ever miss payments. However, you can avoid the late fees by signing up for automatic payments. Further, some lenders may also charge a prepayment penalty if you pay off the loan early.
Monthly payment and term length
Before you sign up for a longer-term loan, you’ll have to make sure that you can afford the monthly payments. The payments will be more affordable, but the level of interest over time will be much greater. For each loan, the lender will provide a detailed schedule of repayment. Double-check that you can afford the monthly payments before agreeing to the loan.
Paying off debt can be tiring and costly to manage, and it feels like it’ll never end. While you may consider many debt payoff strategies like the snowball method or the avalanche method, debt consolidation is a cheap and less exhausting tactic to become debt-free a little faster.
However, it’s essential to make sure you’re looking at all the options. You should always find the best personal loan that fits your needs, budget, and ability to repay. Online personal loan lenders like Money View can make this process as painless as possible by disbursing the loan amount in your account within 24 hours of approval.