Personal loans are often touted as a fast, money-saving way to pay off older debts quickly while consolidating all those debts' payments into one simple amount. And for many people, personal loans are a very good financial product. But these are not free-for-alls that don't have consequences, and you have to be sure that a personal loan and all that goes with it will benefit you and not dig a deeper hole. Luckily, it's fairly easy to determine if getting a personal loan for the purpose of paying off older debts is the right thing to do.
What Is the Interest Rate Like?
This is one of the most important issues. If you're trying to pay off old debts with this loan, you don't want your new interest rate to be higher than the old interest rates. If you're looking at maybe half a percent higher and the loan will have lower payments each month, then maybe that's OK, if you're willing to pay that. But if all you're trying to do is consolidate multiple payments into one, for example, it makes no sense to have an interest rate that could be double what you pay on your current debts.
Look for personal loans that have interest rates equal to or lower than your current debts, except for rare situations like the one just mentioned (where you get better payment amounts in exchange for a tiny interest increase).
How Do the Monthly Payments Compare?
The other most important issue is the payment amount. Consolidation that's done to reduce the overall amount you pay each month has to result in a payment you really can handle -- not just one that's a bit lower but still almost out of reach (if you're at that point, you may need to consult with a financial advisor to find the best solution). Look for a loan that gives you breathing room in your budget.
What Is the Early Repayment Policy?
Most loans have a fairly standard early repayment policy where you can repay the entire loan early, thus saving on the total interest you would pay. However, some loans are not set up like that. A loan where you're committed to paying a certain amount of interest no matter when you pay off the loan is fine if the interest is so small that the difference in time would make little difference in the amount you pay. But be aware that if you are paying a noticeable amount of interest, you might be required to pay all that interest even if you paid off the loan the next day.
Financial services like banks and credit unions can give you more information about personal loans. And speaking with a financial advisor is a good idea, even if you're already in decent shape -- it's always nice to get more guidance for your financial future. To learn more, contact a credit union like Weyco Community Credit Union.
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