At some point in our lives, you have been in a situation where you find it extremely difficult to fulfill your financial responsibilities. In order to fulfill the financial needs, you think of taking another loan which is easy and can be paid off easily later.Most of us think to solve our financial problems by applying online for a personal loan. When you do become eligible for personal loans, you will suddenly find yourself taking one personal loan to pay off the other. However, there are many aspects that should be considered before doing so.
There are two sides to these aspects. One is to read the fine print of your loan contracts and the second one is to be aware of your spending habits. The policies on the agreements are usually gender-specific because of varying income. For example, if you are taking an HDFC Personal Loan, only the guidelines established by that bank are to be followed. Taking one loan after the other to clear your debts can exhaust your finances in the long run and can wear you down. Unless you have a good source of steady income, debt itself is a bad idea.
Factors to consider before using a personal loan to clear off your other loans:
- Speak with a counselor- it is advised to speak with a counselor so that he can look at your portfolio and can recommend the best action to Take at that financial moment. The counselor will usually suggest the option with the lowest risk so that you do not suffer losses later
- Analyze your spending habits- If you tend to spend more, find a method to curb those spending impulses because when you keep borrowing money to pay off debt, you will find yourself in an ocean of debt before you can do anything else. It might be tempting to think that you can pay off all your debt in a short period of time, but that is a risky game to play ad they can definitely become unmanageable.
- Interest- Interest, and loans go hand in hand so taking too many debts will pile up your interest rates and will also negatively affect your credit score. That as a result, will affect your ability to receive lower interest loans in the future. The average interest rate 10.13% for an average 24-month personal loan
After considering all these factors, you also need to know whether or not you should acquire loans to pay for loans. Listed below are the advantages and the disadvantages of using a personal loan to clear off your other debt.
There are many benefits of a personal loan if you are currently paying high-interest rates on other debt like credit card accounts
- Potential to lower interest– Even if your interest changes by a slight margin, it can make a huge difference, especially if you have a lot of other debts. Even a small change in your interest rate can make a big difference, especially if you have a lot of other debt. However, there is no written guarantee that you will get a lower interest rate. Most of it depends on your previous credit score.
- Quick debt payoff- You will be able to pay off all your debt in a shorter time as you will have only one loan per month with a fixed interest rate to handle. Other loans like credit cards do not have a fixed repayment method. If your loan is high, you can never just get away with a minimum payment.
- Single payment- Moving all your debts into one single personal loan payment can surely help you simplify your debt load. You will not have to worry about your previous payment dates and you could keep yourself on track with your payments and your schedule.
- Huge Credit Card Debts – The credit card interest rate in India is around 24% to 36% a year based on your Credit Card Balance. If you have a credit card balance of Rs.50, 000 then the bank will charge an interest rate of upto 36% per year on your balance. If you calculate it, you can guess the total interest rate you need to pay which could be more than your credit balance. So in order to pay the debt, it’s necessary to take a loan with a Low Interest Rate Personal Loan.
There may be a few benefits when it comes to paying off your bets with a personal loan, but there are inherent risks that come along with it. It is important to research well and weigh the pros and cons before taking any action.
- Higher interest rates– Not all lenders offer loans at a low interest rate. There is a massive range when it comes to interest as they can range anywhere from 9 to 35%. You typically need a really good credit score when it comes to getting low-interest rates. Therefore, instead of risking a higher percentage, you would be better off keeping your loan where it stands at.
- Might become unaffordable– There are chances that you might break your budget if you try and take many personal loans to clear off the previous ones. In a few years, you be drowning in loans and that will affect your credit score significantly. If you have a tight budget and very few sources of income, it will certainly become harder to manage.
- Application of various fees– There is something called an origination fee that is charged by many loan companies. It usually ranges from 1 to 6 percent of the debt. Hence, using a personal loan to pay off your other debt becomes more expensive, inevitably, even if the loans have a lower interest rate.
Personal loans are an easy way to finance just about any purchase or idea, but sometimes it may not be the right move. Just because you qualify for a loan, does not mean that you immediately sign up for one. A personal loan itself is so complicated and taking a personal loan to pay off other loans just makes things all the more complex in nature. However, if your financial situation deems it right, there is nothing wrong in using that option to pay off all your debts at a potentially low-interest rate