There are very few times when taking out more debt to pay off credit card debt makes sense. Using a personal loan to pay off your credit card debt is only moving the money around. The debt is still there. You are simply moving the money you owe the bank from one pile to another. It just so happens to be a pile of debt with better terms for you and your family. These are three times it might make sense to pay off credit card debt with a personal loan.
Find out now: How does my 401(k) work?
1. To Lower Your Interest Rates
The most important aspect of a debt consolidation loan is to lower the annual interest rate of your debts. Often, a personal loan can be the perfect instrument for you to lower the annual interest rates of your debt. You should not consider a personal loan to consolidate your credit card debts if it does not lower the annual interest rate you are already paying. Paying a lower interest rate will allow you to pay off more principal each month, help you get out of debt faster, and lower the total cost of your debt.
2. To Consolidate Payments Into One
Consolidating several credit card payments into one loan is a great achievement. Having one loan payment allows you to focus all of your time, attention, and energy into that one payment. It is much easier to concentrate on and pay off one debt instead of having several smaller debts that always seem to nip at your heels.
Of course, you must also strive to not rack up your credit card balances after consolidating your credit card debt with a personal loan. It will not do you much good to focus on one large debt if you begin accumulating smaller balances again on your credit cards. You have to avoid playing a shell game with your debts, and you will need to address the underlying, fundamental reason why you are in debt. Do you have a spending problem? Do you not stick to your family’s monthly budget? You have to address these issues in order to get out of debt and stay out of debt.
3. To Lower Your Monthly Payments
Using a personal loan to consolidate your debts can also lower your total monthly payments for the debts that you owe. You will have to run the numbers, but often you will find that your monthly minimum payment for your one personal loan that consolidated your debt is lower than the total of all your separate credit card minimum monthly payments.
Lowering your monthly payments can help you create a debt snowball and assist you in paying off your credit card and now personal loan debt faster. For example, if you were originally paying $500 per month in minimum payments to the credit card companies and now found yourself paying only $400 per month on your new personal loan, you can afford to apply the other $100 per month directly to your loan’s principal. This strategy will help you get out of debt faster.
If you are not saving money by restructuring your credit card debts using a personal loan, either by cutting down your monthly payments or lowering your interest rates, it is probably not a good idea to restructure your debt. Make moving your debt around worthwhile to you. Insist on a lower interest rate for your debt, lower your monthly payment so you can pay off your debt faster, and take back control over your finances with one lower monthly payment.
Photo Credit: B Tal