About Consolidated Personal Loans
Consolidating your debt with a personal loan can be an excellent method to reduce your monthly interest payments and take the first few steps towards financial freedom. Used responsibly, debt consolidation using a personal loan can help you escape from high-interest debt, reduce the complexity of your finances and improve your credit rating.
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Significance
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Many people mistakenly believe that they need to go through a debt consolidation service in order to best get their debt consolidated into a single personal loan. This is not true in the least---all a debt consolidation service does is contact a bank on your behalf, collecting a hefty fee in the process. Debt consolidation is one of the most common reasons for individuals to take out personal loans. As long as you have a relatively intact credit history, getting one is not complicated.
Function
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The most common motivation for debt consolidation is interest rate reduction. You can use a personal loan to eliminate outstanding credit card debt. The reduction in monthly payments makes it much easier to pay off the principal and interest of the loan much faster, accelerating your journey to positive net worth.
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Features
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Another good reason to consolidate debt is to protect yourself from variable interest rates. Many loans have variable interest rates, which enable lenders to often dramatically increase how much interest they charge over the life of a loan. It's a bait and switch tactic ---they lure you in with low introductory interest rates and after you have run up a large balance on the account, they increase the interest rates and ensnare you with very high monthly payments.
Prevention/Solution
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Negotiate a personal loan with your bank officer to consolidate all or part of your debt load. Go to the bank prepared with your credit history and your monthly bills. Demonstrate to the loan officer how much money you will be able to save every month. Bring a detailed monthly budget so you can prove how quickly you will be able to pay off the loan. Demonstrate proof of employment to the officer to help smooth out the loan approval process. The more data that you bring to the bank, the faster you'll be approved and the lower the rate you will be able to negotiate.
Warning
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Debt consolidation can either be a blow struck for debt reduction or it can be yet another weight dropped atop your household finances. If you are concerned about your financial self-control, close out of your revolving credit accounts after consolidating your debt to make it difficult or impossible for you to add further to your debt load. Many people unwittingly make the mistake of using debt consolidation as an opportunity to take on more loans, recklessly putting themselves even deeper into debt. Before you consolidate your debt, have a concrete plan for paying it all back. Reduce your expenditures and increase your income if possible.
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Resources
- Photo Credit RangerRick, Flickr
