Taking out a loan to pay off your debts can be a good idea, but it is advisable that you have a clear understanding of your financial position.
Take the time to look at all the options available before you commit as you could end up wasting money as there may have been a better solution which could have ended up saving you money.
Before taking the plunge, one of the options you have is to consult a debt consolidation company. The initial consultation is cost-free and without obligation. These debt experts will explain the best options to get you out of debt. Thereafter the decision is yours on how to eliminate your debts.
When you speak to any debt consolidation company or debt expert, be cautious when it comes to debt counselling. Make sure you fully understand what it is before you get sold into it.
There are a lot of pros to it but there are also a lot of cons to it.
Reasons why a loan is a good idea
Taking out a personal loan to repay your debts can be a good idea if you are looking to reduce your overall interest rate.
If after doing your homework you find that taking a loan to pay off your debts will cost you more over time, then taking the loan does not make any sense.
The loan may simplify your debts into one single monthly payment, but if you end up paying a higher interest rate you are wasting money.
Always opt for the solution that reduces the interest rate. A factor to consider here is that, if you have a good credit score, the chances of getting a lower interest rate increases.
Another good reason to use a loan to repay your debt is if you want to simplify the repayment process. When you take out the loan to pay off your debts it becomes easier to manage your payments.
Instead of having to keep track of multiple bills and amounts, you have one single monthly payment to worry about, making it easier to avoid any late payments.
There may be something in your repayment terms and conditions that you wish to improve. You can seek out a loan that has the best possible terms like a shorter or longer repayment plan. Look at the interest and fees that the original lenders are charging you if you find a lender with more attractive terms and fees then take out the loan.
What do I need for this to work?
Taking out a loan to cover your debts may seem like a good idea, but in order for this to work you have to consider three important sets of criteria if the plan solution is to be effective
• High credit score
For the loan to work, you will need to get the lowest interest rate and the best terms that you can.
For this to be a reality, you need to prove to the lender that you are a low-risk borrower. This can only be achieved if you have a good credit score.
A high credit score means that you pay your debts on time and that you do not borrow very often.
• Stable income
For the loan to get approved, you will need to show proof to the lender that you have a steady and stable source of income. The lender needs to be assured that you are capable of paying back the loan.
If you cannot provide proof of income, having a high credit score will not matter, the lender will not approve the loan.
It is very important that you have self-discipline. Taking out the loan will not erase your debt, you are still committed every month. All the loan is doing is making it easier to pay off your debt. You still owe the same amount of money at the end of the day and that is why you need the self-discipline to ensure that you pay off the loan timeously without delay at the end of each month.
Always make sure that the loan is catered for in your budget so that you will always have the funds available.
Whatever you decide on, do your homework beforehand. You don’t want to put yourself in a worse financial position that you already are.
If you have a bad credit score, then it's highly unlikely that you will get a loan. Get your credit score first and see where you can improve.