Although personal loans can be a popular form of borrowing, they can yield more benefits than you think. Of course, having access to a large sum of money quickly can be a benefit, especially if you're looking to make some home improvements or purchase a new vehicle.
However, many may not be aware that if they use a personal loan in the right way, it can be used to reduce their current outgoings.
Before taking out a personal loan to reduce your payments, there are some important factors to consider.
Work Out Your Current Repayments
Working out what we currently owe can be a little overwhelming, but it's also vital to ensure that taking out a personal loan to reduce interest is the best way forward.
To work out how much we're paying in interest, we need to look at our current borrowing. While some may only have one credit score, others may have more, or be in possession of store cards. These need to be reviewed so you can ascertain as to how much is owed on each account, and how much the APR is on each form of borrowing.
Once you have worked out how much is owed in total, you need to look at how often payments are made, as well as how much you pay each month. For example, if you only pay the minimum amount on a credit card each month, you will be paying more interest. Similarly, if you pay the full amount each month, then you need to consider whether a personal loan will be beneficial for this purpose.
Many find that although their debts may not be overwhelming, they borrowing they've undertaken is costing them in a lot in relation to interest. There is where applying for a personal loan can be a feasible option.
Why Consider a Personal Loan to Consolidate Debts?
With many finding that they are often paying more than they should when it comes to interest, they are keen to find a resolution that's simpler and more cost-effective.
Those who are using a personal loan to reduce their interest only have to be concerned with one payment as opposed to many payments needing to be paid at different times.
Because there is only one payment, there is only one lot of interest being paid, which should be lower than the APR of the current borrowing. This means that you are paying much less interest overall. Take a look at our guide Top reasons to get a personal loan in 2018
What Interest Rate Should You Be Paying
The interest rate that's offered on a loan can depend on elements of the application, such as past credit history and the state of the economy itself. As such, there is no set interest rate that will be applied to every case.
When applying for a personal loan to reduce your current borrowing, you need to apply for an amount that covers the whole of your current debt, but with a lower interest rate. It can be tempting to simply go for a loan that shows a lower APR, but it's still worth shopping around for the best deal.
If you already have credit card accounts that are active, but not being used, then it can be a good idea to close these. There is nothing wrong with having a credit card to hand in case of an emergency, but some people may not understand that store cards are also effectively credit cards. When trying to get our finances in order, it can be easy to dismiss smaller debts as irrelevant, but all financial data goes towards building a financial profile to lenders, so it's important to concentrate on all our outstanding debt.
How Long Should the Term of the Loan Be?
When looking to consolidate our debts or reduce our interest, we can focus on the monthly repayments as opposed to the overall debt. One of the most important factors in reducing our debt can be how long we want the term of the loan to be.
This is especially important when considering what impact the interest has on our financial affairs. Loans taken out over a longer term will carry more interest by default, so you could end up paying more if you're looking to spread out your payments over a longer period.
Similarly, you shouldn't put yourself in any financial hardship by trying to pay off the loan in a quicker time frame. It's simply a case of being realistic and finding the ideal balance for your current financial situation.
Other Things to Consider
Just because a loan may offer a single payment, it's not always the best route. Some may find it difficult to secure a loan at a lower rate, and could end up paying even more as a result. Again, research can help in this regard, but it's important to weigh up your options when it comes to clearing your finances.
You also should consider what kind of personal loan to take out. Although an unsecured loan means your assets aren't at risk, it does mean that you may be offered a low amount. Similarly, a secured loan may offer you more, but your assets will be at risk should payments fall behind.
You also need to ensure that if you're taking out a personal loan to reduce your debt overall, then your spending habits match your financial plan. While there are those who will take out further credit and make the payments on time, it can end up costing more interest, purely due to the way money is being spent.
Doing a soft search is always the best tactic when looking for new loans. Money SAving Expert have a great tool for this.
Always be careful when taking out a personal loan, there are a lot of scams at the moment, so we have put together a quick article on how to avoid personal loan scams.