Debt repayment is not always an easy subject, especially when faced with life problems. Failure to pay off debt has several consequences. One of them is a drop in credit score, the opposite of what is desirable.
The fear of such can make you ask, “Can I borrow money to pay off debt?” Consolidating debt can be done through a personal loan. Personal loans have lower interest rates and lesser risks. They can help you save money over time. Keep reading for an in-depth analysis of borrowing money to pay off debt.
Consolidation Loan for Debt Payment
A consolidation loan involves taking out one loan to cover all your credit card debt at once. So, instead of a series of payments, debt consolidation rounds off all your credit card debt and makes it one fixed-rate amount to pay off.
This can be done in different ways depending on your debt and your preferences. Consolidation loans come with various advantages.
We’ve listed some below.
1. Decreased repayments – Paying a fixed interest on one loan can considerably lower your charges and admin fees. This means more money in your pockets.
2. Less to manage – One fixed payment is easier to manage than multiple payments with different interest rates. This can help you plan your finances better.
3. Increased credit rating – Paying off your loan can help increase your credit rating. A good credit rating can come in handy when applying for another loan or trying to get another credit card.
4. Lower interest rate – With a good credit score, you may be able to decrease your overall interest rate through debt consolidation. Do keep in mind, however, that different debts come with different interest rates, meaning some will be higher than others. This means that the rate you receive from consolidating your debt will be higher than some of your previous interests and vice versa.
How to Consolidate Debt
Applying for a consolidation loan is an easy process. It can be done online, over the phone, or at an institution. The more money you pay towards the loan the faster you can pay it up, this decreases the overall interest charged. You can also use a mortgage loan to consolidate debt. Withdrawing from your mortgage to consolidate is wise as you don’t have to repeat the application process.
Personal loans have lower interest rates compared to other forms of borrowing such as credit cards.
The documents required to apply for a consolidation loan include,
- Proof of income with three salary deposits
- Proof of residence not older than three months
- Your latest bank statement with three salary deposits
Disadvantages of personal loans
Consolidating debt with personal loans has its risk.
Below are some negative effects of personal loans.
- A personal loan can lead to more debt, so you must get to paying off your credit card debt as soon as you receive it.
- A lower interest rate is not always a guarantee. Know the exact interest rate you’ll be paying before taking on the personal loan. If the rates are not ideal, search for better options.
- Personal loans have fees. Consider the charges involved when taking one. These charges include application fees, origination fees, prepayment penalties, late payment fees, returned payment fees, or protection insurance.
Borrowing money to pay off debt requires discipline and commitment. There are various benefits to it if you follow all its terms. By weighing your situation and calculating the risk, you can make the right decision based on your needs and preferences.