Getting rid of debt should be something that is at the top of everyone?s financial to-do list. If you have debt that is costing you in the form of interest charges each month, you should make the elimination of that debt your highest priority. While there is nothing wrong with paying some interest on your mortgage or even a car payment (at a reasonable rate), credit cards and other high interest debts should be dealt with as soon as possible.
In many cases, taking out an unsecured loan can make it possible to pay off debt quicker?and save money along the way. While this won?t be a viable option for everyone, it can be the perfect choice for individuals in the right circumstances. Following are three reasons to consider using an unsecured loan to pay off your debts.
Better Rates
By far, this is the biggest reason to look for an unsecured loan that you can use to pay off other debt. Depending on your credit history, you may be able to get an unsecured loan in the range of 6-8%. If you are using that money to pay off credit card debt, for example, you will be coming out way ahead in the long run.
The idea is simple ? take out a loan in the amount that you need to eliminate your credit card debt, and use that money to pay off the cards. You will obviously have to switch from making credit card payments each month to making loan payments, but the interest rate savings will be huge. This can be done through a company like Avant, which allows you to get funds in potentially one business day, so you can pay off the cards and start saving money right away.
Consolidate Your Payments
This benefit comes in the form of simplifying your life a little bit. Rather than making payments to several different credit card companies every month, you can just make one payment on your unsecured loan after you have wiped out those credit card debts.
This will streamline your accounting and make it easier to keep track of where your money is going on a monthly basis. Also, by reducing your overall number of accounts, you decrease your chances of forgetting to make a payment and incurring a late fee.
Eliminate Some of Your Cards
While it may be?a good idea to keep one or two credit cards on hand for emergencies and other benefits?you don?t want to have too many of them available as a temptation. Once you pay off your balances using an unsecured loan, close some of your accounts so that you only have one or two open and available to use.
In the best interest of your credit rating, keep the oldest accounts open, as those have a positive effect on your credit score. That being said, you might want to try and move some of the available credit, if possible, to another card so as to not negatively impact your credit utilization ratio – which will also hurt your credit score.
Have you ever considered taking out a personal loan to pay off high interest debt? What other creative ways have you used to help pay off your debt? How have you seen people misuse a personal loan?
Photo courtesy of: Mark Moz
Wise Dollar
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I think this is good advice if someone has gotten over their head in credit card debt and is truly ready to turn their financial life around. I cannot emphasize too much that I think it’s a turnaround strategy. You have to recognize that you can’t use an unsecured loan to put yourself in a better place if you are going to keep running up more debt. Take those cards that got you in trouble and put them away. Make sure you are also contributing to savings so that when those unexpected expenses turn up (and they will), you don’t have to turn to more debt to cover them. You have to make a commitment to responsible credit card usage for an unsecured loan to be a solution to your debt problem.
Excellent point Emily – I could not agree more. If you’ve truly changed your attitude towards money/spending a personal loan can be a great idea. If not, then it should be avoided.
From my perspective the biggest advantage of a personal loan is changing the repayment structure, rather than the interest rates, or consolidation aspect. Revolving debt gives people too many freedoms to make only the minimum payment. An installment contract on the other hand, is more rigid. It forces people to retire their debt within a specified time frame.
Good point Kevin. I think the potential savings/one payment are nice benefits though the key is that specific time frame – assuming like Emily pointed out above that there is a changed attitude.