It's hard to make ends meet when you're struggling with debt, but taking out a new loan to pay off an existing one could be an option, but with careful consideration. Debt consolidation loans and other forms of debt consolidation — like balance transfer credit cards and home equity loans — come with their own risks.
Knowing the costs of taking out a new loan
Taking out a loan to pay off another loan requires careful planning. There are costs associated with any loan, namely the interest rate and fees. The interest rate is typically expressed as an annual percentage rate (APR). This is the amount of interest you pay each year if you don’t pay more than your minimum payment each month.
To calculate how much interest you will need to pay, multiply your outstanding balance with your APR. An example would be multiplying $1,000 by 10% (0.10) to get $100 in interest charges in a year.
Fees that could increase your total debt include:
How to create a debt consolidation plan
Because we've all been there, it's important to remember that it's not so much a mistake as a learning experience. We all make mistakes, but you can learn from this one and move on. To do so, create a debt consolidation plan.
To start your debt consolidation plan: make a list of all your debts (including the interest rate and repayment terms) and work out how much you can afford to pay each month. Next, consider which debts are worth paying off with your loan (or whichever method you're using).
When you should consider consolidating your debt
You should consider consolidating your debt if you meet one or more of the following criteria:
If paying off debts is the main motivation for getting a loan, speak to one of our brokers after you've submitted your loan application
If you've decided that getting a loan to pay off another loan is the right choice for you, it's important to talk to one of our brokers. It's also important that you do your own research, because ultimately it's up to you and not anyone else to make the final decision. After all, no one knows your personal financial situation better than yourself!
While speaking with us, we may be able to help identify any risks associated with this type of loan. It's not just about brokering a loan at LoanOptions.ai, our brokers are ultimately here to assist you in the best way possible. We can help outline some of the benefits and costs involved in taking out a second loan. If paying off debts is the main motivation for getting a loan, they may also be able to suggest other alternatives that could potentially make more sense given your current circumstances.
Loan Options predictive AI can match you with the best loans for using your circumstances, without impacting your credit score. Chat with our team about how you can improve your credit score so you never have to stress about getting the finances you need.