[ad_1]
Debt consolidation through personal loans can be an effective strategy to pay off existing debt. However, these four debt consolidation loan options are not ideal and should be avoided. (iStock)
Many Americans face the personal financial challenges of overcoming student loan debt, credit card debt, and mortgage debt. Some believe that they may never be able to pay off their debts in full. Even if you have a large balance spread across multiple loans, a personal loan is an affordable and responsible way to pay off your debt.
Whenever you’re considering taking out a personal loan, whether it’s to consolidate your debt or help you renovate your home, use Credible’s free online tool to compare interest rates and lenders. Just a few extra minutes will save you money and time.
4 debt consolidation loans to avoid
Choosing to consolidate your debts into a single personal loan is usually a smart option for those with multiple outstanding loans. Unfortunately, not all debt consolidation loans offer the same benefits. In fact, there are four loans to avoid when consolidating your debt.
- high interest loan
- Loans with high fees
- 401(k) loans
- home equity loan
1. High interest loans
Taking out a loan at a high interest rate is not recommended in most scenarios. Especially when trying to consolidate debt. The average interest rate for personal loans is between 11% and 14%, but you can find interest rates as low as 3.99% if you look around. By comparing interest rates from multiple lenders, you can clearly identify the best interest rates available in the market and avoid overpaying when paying off your debt.
There are many debt consolidation loans available for borrowers with different financial histories. Visit Credible to explore personal loan options and compare current rates and lenders.
How to Get a $100,000 Loan
2. Loans with high fees
Before signing up for a low interest personal loan, it is important to consider other costs associated with the loan. Some lenders offer personal loans with additional fees attached. One of the fees is the origination fee, which may also be listed as an “underwriting”, “administration”, or “processing” fee. These fees can be as high as 10% and unnecessarily increase your repayment amount.
Interested in learning more about the fees some lenders charge for personal loans? Visit Credible to connect with experienced loan officers who can answer all your personal loan questions.
What you need to know about personal loans
3. 401(k) loans
If you’ve spent years investing in your 401(k), using this savings account may seem like a reasonable option to pay off your outstanding debt. It’s easy to see this as an opportunity to effectively borrow from yourself and then pay it back with interest back in your pocket.
Unfortunately, it’s not as simple as it looks. Withdrawing money from your 401(k) can be a risky decision because it jeopardizes your financial future in many ways. If you lose or leave your job, you may be forced to pay taxes or fines on the amount you borrow. It can also reduce the total amount your company is worth, making it impossible for you to maximize your retirement savings.
5 types of loans to consider
4. Home equity loan
Paying off your mortgage will increase your home equity. This equity is available for a lump sum payment through a home equity loan. Many homeowners are using this equity to renovate their homes or 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 house itself.
Using Personal Loans for Debt Consolidation
There are some pros and cons to using personal loans for debt consolidation. Here’s what you should know:
Strong Points
If you choose responsibly, debt consolidation with a personal loan can be in your favor.
- Low cost of loan: By consolidating multiple loans into a single loan with low interest rates and low fees, you can reduce the overall cost of your loan.
- Easy to maintain: Not only can you save on your total costs, but a single loan is much easier to administer and maintain.
- Prevent payment delays: Ultimately, this helps prevent late payments and non-payment. This can increase overall costs and interfere with other financial goals.
Managing multiple high interest loans can be costly. Visit Credible and use our Personal Loan Calculator to find the best personal loan interest rates.
Cons
However, there are some caveats.
- Not all borrowers receive the same benefits. Using a personal loan for debt consolidation can be a cost-effective option, but not all loans receive the same benefits.
- You may have trouble getting approved: Factors such as credit score, debt-to-income ratio, and loan amount can affect the approval process. In other words, personal loans may not be the ideal consolidation strategy for liabilities such as high credit card balances.
According to Experian data, the average American’s credit card debt is just over $6,000. If you find it difficult to manage your credit card debt, you should also consider opening a balance transfer card to pay your bills. You can migrate to a lower new card.
To find out if you’re eligible for a balance transfer card, visit an online marketplace like Credible to view multiple 0% credit card options at once.
Can I get a personal loan without a credit check?
[ad_2]
Source link
