November 6, 2020
Debt is a huge burden on anyone’s shoulders, especially if you are looking to start buying presents or give to charity this holiday season. Working your way out of a snowball of debt is doable, and if you take the right personal finance steps, you can join millions of people who have climbed out of debt. And when you do, you will be in such a better financial and mental state to give back.
If you are looking for a way to pay down your debt, one way is to consolidate your loans and find a better rate. Many people opt for personal loans, however, these can be deceiving and advertise low rates. Make sure to shop around so that you avoid extra fees and higher interest rates after the promotion on the personal loan ends. The worst case scenario would be to fall into deeper debt due to taking on a personal loan that you simply cannot make payments on.
To help avoid this, check out what you should know before signing the dotted line on a personal loan.
What is a personal loan?
A personal loan is an amount of money lended to an individual by a lender or bank. It includes repayment terms and a fixed interest rate. Personal loans tend to carry very high interest rates because they are unsecured. That is to say, the bank or lender does not have collateral in case you don’t repay the loan, which is why they charge high fees. You should really only consider a personal loan if you are in an extreme financial hardship, and have read all of the fine print.
Why do people get personal loans?
One of the most common uses of a personal loan is to consolidate debt. If you have a lot of debt, from many different lenders, you might consider consolidating them all into one personal loan account. The benefit of consolidating debt is that you take on one new loan to pay off all of your debts, with a lower interest rate than paying off each loan separately. Consolidating debt also results in a single payment due every month instead of a cascade of payments, making managing your debt that much easier.
Taking on one loan versus keeping your debts scattered across accounts is a tactic intended to lower the overall interest you are paying on your debt, thereby reducing the amount you’ll end up paying and/or the time it takes to pay it off.
What should I watch out for?
Personal loans vary from lender to lender. The rates, fees and terms are always different, depending on who the loan is coming from and who the borrower is. For example, if you have great credit, chances are you’ll find a pretty attractive loan. Before signing any paperwork, you can use an online credit consolidation calculator to figure out exactly how much you could actually save. It’s important to do the research to see if your new loan actually makes sense and will in fact, save you money versus keeping all of your debt open and paying them off one by one. Many companies will advertise low interest rates, but those may only be applicable during a promotional period of time. Taking out a personal loan, especially a big one, is a huge financial decision. Before you sign the paperwork and move forward with a lender, make sure that you will be able to handle the payments. If not, you will only add more financial stress to your situation.
Will I get a better interest rate?
Ideally, you work off the debt snowball with a lower interest rate through a personal loan. And yes, a big part of getting out of debt is having a lower interest rate. However, it’s not the only important part of getting rid of debt. If a low interest rate was the “answer” everybody would figure out how to borrow their way out of debt. Unfortunately, many people feel like when they get a lower interest rate, they don’t change any of their habits that got them into debt and may not tighten their belt and keep spending.
Remember, a personal loan is a step in the right direction of getting rid of debt. But make sure to address the factors that got you there in the first place. Try making a budget, living off less, or start our 4-week challenge for a free personal finance bootcamp.
How to evaluate a personal loan
Unfortunately, finding a proper fit for your personal loan requires shopping around and comparing rates. To get the best loan for your situation, you’ll need to do some research. Here’s what you need to know.
What else should I consider?
Some loans are specific about what the funds can be used for, such as healthcare or education. If you’re looking for a loan to do home improvements, make sure you find a match. Don’t forget about your local credit union. Most local credit unions offer personal loans that are more transparent and easier to manage. Call and ask what they offer before signing up with an online website.
Getting out of debt is the first step in getting your personal finances in order so that you can meet your personal finance goals. If one of your goals is to create and maintain generational wealth, start with a financial plan that will put you in the best position possible. To learn more about how to #GiveWealth, download our 4-week challenge today.