More People Using Personal Loans to Cut Their Credit Card Debt
In the years after the severe economic crisis that the country faced during 2008 and 2009, several people have been considering acquiring a personal loan with the purpose of paying off some credit card debt. However, due to the lingering fears of the past recession, may of them are still wondering if taking a personal loan might be a good idea, especially since most people fear that it will affect them when buying a house.
Is there real danger in acquiring a personal loan?
While many people see personal loans as a way to get rid of debt, it is important to remind them that taking out a personal loan doesn’t just makes all debts disappear. On the contrary, for those who choose to pay off their, say, credit card debt, it will just restructure the way they finance that debt. In fact, people interested in acquiring a personal loan through their bank or other financial institution, should only consider it seriously if they can get a) a lower interest rate on the personal loan than the one they are subject to with their credit cards or b) if they can get a lower monthly payment, a longer loan term or both.
Let’s take a look at some scenarios in which acquiring a personal loan might or might not make sense.
For example, if a customer is happy paying just the minimum monthly fee on their credit card, then would not make sense for them to acquire a personal loan through their bank. The reason for this is that by paying just the minimum fee of their credit cards, there is no defined term on that credit card debt. A personal loan on the other hand, will have a defined loan term ranging commonly between four and five years.
Another common reason for thinking about getting a personal loan is that lower interest rates can drastically reduce the total expense on the debt. However, personal loans are typically unsecured debts, which makes them dependant on a good credit history. So what happens is that if a customer boasts a spotless credit record, he or she will definitely enjoy a far lower interest rate on a personal loan.
There is something to consider a bout personal loans however, it is common for them to be focused more on the short term, lasting usually no more than four or five years. Naturally, this will cause customers to have increased monthly payments, even if it is with a lower interest rate. Let’s not forget: The longer the term and the lower the rate, the lower the total monthly payment will be.
Many people consider acquiring a personal loan so as to be able to restructure their outstanding debt. By doing this, customers can group many credit card balances into one main loan, thus reducing their monthly payments while at the same time being on their way to be debt-free.
Now, as for acquiring a personal loan having an impact when trying to buy a home, it all comes down to the customer’s credit score, which the mortgage lender will surely check beforehand. This considered, acquiring a personal loan to consolidate an outstanding will have a rather imperceptible impact anyone’s credit score.
Other things to consider: While using a personal loan to consolidate credit card debt will have the positive side of increasing the types of credit the customer uses as well as his or her available balances on their credit cards, it will also have a negative side, since the customer will now have have a recent credit inquiry due to the personal loan.
So, to sum up: Consolidating debt by acquiring a personal loan can be both positive and negative for the credit score depending how it is seen. But in essence, if customers can benefit from it with either smaller payments or longer term periods, then personal loans can be greatly beneficial for anyone’s finances.