Borrowers who find themselves paying several EMIs and credit card outstanding balances each month may make things more manageable with debt consolidation. It is the process of taking a small personal loan to pay off the existing debt and consolidate them into one new loan with a lower interest rate and extended repayment term. Debt consolidation simplifies the repayment plan and saves money and time if handled correctly.
How small personal loans help consolidate debt depends on the individual’s financial goals and situation. Here’s what an applicant must know before applying for fast personal loans.
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How Does Debt Consolidation with a Personal Loan Help?
Debt consolidation means taking a new loan to repay older liabilities and debts. It is an effective way of combining several debts into one, lowering EMIs, saving money, and managing the finances better. Here’s how debt consolidation with a personal loan help.
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Pays off multiple debts with one new loan:
Debt consolidation ends the hassle of paying several EMIs and credit card outstanding balances each month. The borrowers can pay all their debts with a personal loan and make repayment easier to manage.
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Makes Loan Repayment Easier:
Consolidating debts does not eliminate them but makes their payment easier. After paying the existing debts, the borrower still needs to repay the small personal loan. However, the process aims at making the borrower completely debt-free over time.
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Saves from a Debt Trap:
Many people with outstanding balances keep borrowing new debts to pay off old ones and soon find themselves in a debt trap. Since many personal loan lenders provide ample loan amounts to consolidate debts, the individual does not need to borrow more from other lenders, relatives, or friends. Therefore, a personal loan online apply saves the borrower from an unending debt trap.
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Helps Save Money:
Consolidating debts with a small personal loan helps save money because these loans are more flexible and have lower interest rates. Besides, paying off a single loan is easier on the pocket than paying several debts at different interest rates. Therefore, it simplifies the task of easily paying multiple debts and saving money.
Times When Debt Consolidation Proves to be a Good Option
Fast personal loans have no end-use restrictions. So, the borrower is free to use them the way they want, be it to fund a wedding, vacation, medical emergency, or home renovation. However, those considering debt consolidation with a personal loan will find it more lucrative at the following times:
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When the Credit Score is High:
Lenders do not prefer lending money to those who are already indebted heavily and have a low credit score at the same time. However, those who have maintained a high credit rating of 750 or above will quickly get a debt consolidation loan at a lower interest rate. Easier loan terms and conditions will make debt consolidation a lucrative option for such borrowers.
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When the Existing Debt Has High-Interest Rates:
Personal loans have lower interest rates than many other types of debts, especially credit cards. If most of the existing debt consists of credit card outstanding balances, they can save big by opting for a lower-interest rate on a personal loan. Consolidating debt with a personal loan will not only make repayment easier but also save money on interest charges.
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When the Borrower has a Solid Repayment Plan:
Credit card is a type of revolving credit that allows borrowing and repaying on an ongoing basis. As a result, most borrowers do not have a set repayment plan for their outstanding balances. Those who continue using their card and paying only the minimum amount often find themselves in a never-ending debt trap. On the other hand, personal loans have a fixed repayment term, which keeps the borrowers motivated to stick to their repayment plan and manage their monthly budget.
While debt consolidation has clear benefits to paying off the existing debt, there are certain situations when it may not be the best fit. An individual should avoid taking a debt consolidation loan if they have a poor credit score and no repayment plan. Besides that, if the debt is not too high and it’s possible to repay in the next 12 months, then researching and taking a personal loan will not be worth the effort.
Conclusion
Paying off the existing debt with fast personal loans has significant positive effects on an individual’s financial health. However, it only works if the borrower avoids racking up the bills again. Using a budget to control expenses and avoiding spending more than one can afford are quick tips to maintain finances. People who take these steps to manage their debts responsibly have a better chance of staying debt-free.
