You may think debt consolidation and personal loans are separate solutions for money management. When you consider recent changes in interest rates you’ll see consolidation and personal loans fit together quite well.
For many years, your APR on credit card accounts was a direct reflection of your own creditworthiness as much as the prevailing interest rates. Those with bad credit might have 26% interest rates a few years ago but you might have the same lender’s credit card with a 9.9% APR.
Today even those with good credit have been facing high finance charge on their accounts. It is rare today to find an interest rate of less than 16% on a card unless the account holder has a stellar credit rating.
Credit Card Consolidation
There are many reasons to consider consolidating several card accounts in one larger account with one monthly payment. For some consumers, the choice is based on an inability to make multiple payments monthly on credit debt with high rates of interest.
For others, the thought of paying more in finance charges than they need to is motivation to seek ways to consolidate the debts. Once the decision is made you must find the best way to reduce your payments or your finance charges.
Credit card consolidation and personal loans work together if you qualify for a bank loan at current low interest rates. If you have three credit card accounts where the interest has been changed from previous low rates to rates of 18% or more, you are paying a significant amount of money each month just for finance charges on those accounts.
This is money spent for the privilege of having a charge card with a balance carried from month to month. The previous bonus of being able to pay for large purchases over a longer term has been eliminated by the current high interest rates.
To obtain a personal loan you will need good credit. If you are struggling to make monthly payments due to reduced income or if you have made late payments on credit accounts, you may not be able to qualify for a personal loan.
Paying Off Old Debt with New Debt
Standard financial advice for many years has been never to create new debt in order to be able to pay off old debt. This advice no longer works as credit card interest rates have reached new heights even for those consumers with decent credit ratings.
Debt consolidation and personal loans can be the solution if you are able to obtain an unsecured personal loan from your bank.
Another alternative is to obtain a private loan from a friend or family member. The interest rate on a bank loan is likely to be less than half of the rate charged by a credit lender today. An important point to remember is that credit card debt is unsecured debt.
If you are unable to pay the amount due you will damage your credit rating and you will likely get many phone calls from collectors (even after non business hours). However, you will not lose the items you purchased with that credit card.
In an extreme case, you may file personal bankruptcy to discharge the debt or to reduce the payoff amount. This step is guaranteed to damage your credit file for a full ten years and should be the last option you consider.
With a personal loan, you can pay off all of your credit debt and end up with one monthly payment over a specific period of time. That payment will be far less than the combined payments you are now sending to credit lenders and the debt will be paid in full on a pre-determined date.
If you pay the minimum on your cards each month you may be paying off the debt for 20-30 years and the finance charges may be higher than the actual debt incurred.
Disadvantages
If you have bad credit you will not qualify for an unsecured personal bank loan. You may still be able to obtain a private loan from a family member or may find acceptable loan terms on one of the websites where investors participate in granting personal loans to worthy applicants.
The success of debt consolidation and personal loans as a method to solve your financial problems depends on putting the cards away when they are paid off. If you continue to make purchases on the card your debt will become a problem once again.
Summary
If you have high interest rates on your credit cards and monthly payments have become a burden, debt consolidation and personal loans may be the best options to consider.
