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Debt consolidation through a personal loan can be an effective strategy for paying off existing debt; However, these four types of debt consolidation loan options are not ideal and should be avoided. (iStock)
Many Americans face the personal finance challenge of overcoming student loan debt, credit card debt, and mortgage debt; so much so that some think they may never be able to fully repay their debt. Even if you have a large balance on several loans, a personal loan allows you to pay off your debts in an affordable and responsible way.
Whenever you’re considering taking out a personal loan, whether it’s to consolidate debt or participate in home renovations, use Credible’s free online tools to compare rates and lenders. Taking a few extra minutes can save you time and money.
4 debt consolidation loans to avoid
Choosing to consolidate debt into one personal loan is usually a smart option for those with multiple loans outstanding. Unfortunately, not all debt consolidation loans offer the same benefits. In fact, there are four loans to avoid when consolidating debt, including:
- High interest rate loans
- Loans with high fees
- 401 (k) loans
- Home equity loans
1. Loans with high interest rates
Taking out a high interest rate loan is not recommended in most scenarios, especially when trying to consolidate debt. Although the average personal loan rates are between 11% and 14%, you can find rates as low as 3.99% if you shop around. By comparing the rates of several lenders, you can clearly identify the best rate available in the market and ensure that you are not paying too much when you pay off your debts.
There are many debt consolidation loans available for borrowers with varying financial backgrounds. Explore your personal loan options by visiting Credible to compare rates and current lenders.
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2. High cost loans
Before committing to a personal loan with a lower interest rate, it is important to take into account the other costs associated with the loan. Some lenders offer personal loans with additional fees. One of the charges is an original charge, which can also be listed as an “underwritingâ€, “administrativeâ€, or “handling†charge. These fees can go up to almost 10%, unnecessarily increasing the amount of your refund.
Would you like to know more about the fees charged by some lenders on personal loans? Visit Credible to get in touch with experienced loan officers who will answer all of your personal loan questions.
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3. 401 (k) loans
If you’ve spent years investing in your 401 (k), tapping into that savings account might seem like a reasonable option to pay off outstanding debt. It’s easy to see this as an opportunity to effectively borrow from yourself and eventually pay it back with the interest that goes back to your pocket.
Unfortunately, this is not as easy as it sounds. Withdrawing money from your 401 (k) can be a risky decision, as it jeopardizes your financial future in several ways. You may be required to pay taxes or penalties on the borrowed amount if it is not paid back on time or if you lose / quit your job before the loan is paid off. You will also potentially reduce the overall amount matched by your business, preventing you from maximizing your retirement savings.
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4. Home equity loans
As you pay off your mortgage, you will increase the equity in your home. This equity is accessible through lump sums through a home equity loan. Many homeowners tap into that equity to renovate their homes or to cover emergency expenses.
However, home equity loans should not be used to pay off existing debt. A home equity loan ties the debt to the home itself, which means it can be foreclosed if you don’t pay off the loan.
Using Personal Loans For Debt Consolidation
There are pros and cons to using personal loans for debt consolidation. Here’s what you need to know.
Advantages
Debt consolidation through a personal loan can be beneficial when chosen responsibly.
- Lower cost of the loan: Consolidating multiple loans into one loan with a low interest rate and low fees can reduce the overall cost of the loan.
- It’s easier to maintain: Not only can you save on total expenses, but a single loan is much easier to manage and maintain.
- Help prevent late payments: Ultimately, this can prevent late or missed payments, which will increase your overall spending and potentially disrupt your other financial goals.
Managing multiple high interest loans can be costly. Visit Credible and use their personal loan calculator to find the best personal loan rates.
The inconvenients
However, there are also some things to be careful of.
- Not all borrowers enjoy the same benefits: While using a personal loan for debt consolidation can be a profitable option, not all borrowing will enjoy the same benefits.
- You may have trouble getting approved: Factors such as your credit rating, debt-to-income ratio, and loan size can affect the approval process, which means that a personal loan may not be the ideal debt consolidation strategy. such as high credit card balances.
According to Experian data, the average American has credit card debt of just over $ 6,000. If you are having trouble managing your credit card debt, you should also consider opening a balance transfer card to pay your bills. A balance transfer card allows you to transfer your existing credit card debt to a new card with a lower APR.
To see if you qualify for a balance transfer card, visit an online marketplace like Credible to view several 0% credit card options at once.
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