When Not to Use a Personal Loan to Pay Off Debts
Posted March 1st, 2010
by PersonalLoans.org Staff
Many banks and lenders package their personal loan products in such a way as to try to appeal to people that want to pay off debts. This isn’t a bad thing, by itself; a personal loan can indeed be a valid way to reduce your overall debt. Still, in spite of what the commercial might tell you, there are times when it’s just not that good of an idea to use a personal loan to pay off debts.
Here are some things to think about when you’re considering whether or not to take the personal loan plunge:
- Understand the terms of the loan. Otherwise, you could wind up paying more in interest in the long run. For example, you might have a variable rate loan. That means that the rate on your personal loan could go up at intervals specified in your loan contract. If the debt you’re paying off is at a fixed rate that won’t change, your personal loan rate could conceivable catch up to and even pass your other debt. The same holds true if the personal loan has a low introductory rate that will automatically go up significantly after a period of time.
- Be sure you can afford the personal loan. In theory, by paying off other debt you’ll reduce your overall monthly obligations. Still, if you don’t have the budget to make the personal loan payment, you aren’t going to be any further ahead. If you can’t make the payments, you might consider turning to other solutions, such as consumer credit counseling, before you turn to a personal loan to solve the problem.
- Don’t build your other debt back off. What happens, in some cases, is that a person will take out a personal loan to pay off their credit cards. Then, because their credit cards are paid off, they wind up going back out and racking up a bunch of additional credit card debt. Then, you’re further behind than when you started. Some lenders will even require that, if you’re taking out a personal loan for the purposes of consolidating debt, that you close the accounts that are being paid off as one of the conditions for approval of the personal loan. If you’re likely to go out and build your debt again, you’re better off not taking the loan in the first place.
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