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.
Managing multiple debts simultaneously can prove to be daunting and complex. Consolidating your debts can assist in amalgamating all your current liabilities into a singular loan, thereby providing you with enhanced management of your finances.
A prevalent method to achieve this consolidation is through securing a new personal loan and utilising its proceeds to settle your other outstanding debts. Subsequently, you would repay this consolidated loan through a unified series of payments over a predetermined period, reassuring you of knowing precisely when and what amount your payments will be.
Imagine you're juggling debts from two credit cards, one with a $4000 balance and the other with $5000, alongside a personal loan carrying a $9000 debt. Each debt typically comes with its own interest rate, repayment schedule, and due date, complicating your ability to manage them effectively.
To streamline your finances, consider consolidating these debts into a single personal loan. This approach means you'll only need to handle one recurring payment throughout the loan's term, benefiting from a consistent interest rate.
If the interest rate of the new personal loan is lower than that of your existing debts, it could even accelerate your progress towards reducing your total debt.
Utilising a personal loan repayment calculator can assist in estimating your potential repayment amounts.
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:
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).
You should consider consolidating your debt if you meet one or more of the following criteria:
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 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.
