Debt Consolidation Personal Loan, How to Choose One, What to Look For
One of the doubts unsecured loan customers have when it comes to repayment is, if it is worth going for the personal loan route to pay off their bills. This is mostly evident in credit cards, when a person has a few credit card payments outstanding and he or she would like to opt for debt consolidation.
Going for personal loans for debt consolidation is a good idea; there are many banks today that offer unsecured and secured personal loans and they can be a real boon if used correctly. For instance, some banks customize and give personal loans that actually solve debt problems. Interest rate is of course a moot point when it comes to choose a payment plan to pay off our existing debts. Here are some things that you may want to take into consideration when choosing a persona loan for debt consolidation:
1. Types of personal loan – A person loan can be of two types-secured and unsecured. A secured one has some kind of asset as security tied to it. If you default on the loan, the bank or the provider of the loan can take ownership of the asset. An unsecured loan has no collateral, and if you default on this, the bank or the provider of the loan has no other option to but to ask for collections to take strict action or initiate a legal recourse.
Both types of personal loans are for a particular period of time, like 3 to 5 years. Though the repayment and monthly payment every month is fixed, which makes personal loans even more viable, the unsecured kind will carry a higher interest rate, understandably so.
2. Interest rate – The reason it is advisable to go for personal loans for debt consolidation is because they have lower interest rate than the credit card. However, the affixing of interest rate on the persona loan depends on three factors- income, payment history and credit score. If your credit score and income is high, you can get the person loan at lowered interest rate. The bank and the state in which you apply for personal loan can also impact the interest rate. So, it is better to check with the website of the bank to know the exact loan you can get and the interest rate.
3. Period of the loan – If you can get a better interest on your personal loan compared to your credit card, go for it. But then also check out the tenure or the duration of time, in which you have to pay back the loan, the prepayment penalty and if you can consistently pay back the money every month.
4. Keep a reservoir of emergency funds – Set aside a fixed sum of money ever month; this can build up a reservoir of ‘emergency funds’ over a six month period. So the next time, you are in a debt-trap, you can just pay through this emergency kitty. If you are starting late, and have taken personal loan, the emergency funds can come handy later as well.
