With the average credit card holder owing $15,950 in credit card debt, it's only natural that people are looking for ways to get out of debt quickly. As a result, demand for personal loans has been on the rise--particularly among people looking to consolidate their credit card debt. However, it's often difficult to understand whether or not a personal loan is the right choice given your specific financial situation.
In order to better understand your personal loan and debt management options, it's important to know which circumstances benefit from consolidation. Fortunately, these benefits are actually quite simple to grasp and the financial savings from them is easy to calculate, and this article will help you do so.
Benefit #1--Cost of Your Debt
Your debt has a monthly cost associated with it. Interest rates, late fees, overdrafts, and other contract agreements are how credit card lenders make their profits. As most people understand, the longer you carry a balance on a credit card, the more money you pay to the lender.
A personal loan tends to carry a lower interest rate than the typical credit card. For significant levels of credit card debt, a reduction of the interest rate can save you a significant amount of money--particularly when the debt is paid off over a period of years. If you have debt levels that cannot possibly be paid off in less than one year, a personal loan is probably a sound financial choice for you.
Benefit #2--Schedule of Payments
A credit card's value comes in the form of versatility. As long as you stay within debt limits, you can use the credit line whenever you want and for whatever you want. Aside from paying the minimum payment, you can also schedule your payments to meet your current situation and budget.
On the other hand, this flexibility is a big contributing factor to people carrying more debt than they should. It takes a lot of discipline to pay down a high credit card balance over time. Sometimes, the structured repayment schedule of a personal loan is needed to help facilitate the repayment of your debt. While this doesn't technically have a dollar amount attached to it, the value is present nevertheless.
Benefit #3--Damage Control
Random events can often create financial crises. An unfortunate auto breakdown or medical expense can take a balanced budget into the danger zone in a hurry. When this happens, a sensible debt repayment plan can become effectively impossible--causing debt holders to turn to more creative methods for debt repayment.
One such method is the snowball approach. Snowball method users list their debts by total outstanding balance, then pay off the smallest balances first. This frees up more money each month for the repayment of other debts. A personal loan is the perfect way to start this process--particularly when the cost of the loan is smaller than the cost of the individual debt accounts.
Benefit #4--Stress Reduction
Account management is a difficult chore. Between retail credit accounts, bank accounts, and outstanding debts to service providers, it's not uncommon for homeowners to have 15-20 payments to make each month. Mistakes that result in late payments can often cost $35 dollars each.
Personal loans can often consolidate a large number of small debts into one simple payment. Even if the net cost in terms of annual percentage rate is the same, easy payment procedures can often save certain folks hundreds of dollars each year--not to mention countless headaches around the house!
While it seems odd to take on additional debt for the purpose of debt repayment, personal loans can facilitate debt management in a number of powerful ways. By looking at your current financial situation with these benefits in mind, you'll be able to accurately estimate the positive impact of personal loans on your daily life.