You may already have a personal loan and several credit cards and be wondering if it makes financial sense to take on any more borrowing. You could be struggling to keep up with repayments already and the thought of adding another outgoing to those you already make might be too much.
But there are plenty of good financial reasons for taking out a personal loan, no matter what your personal circumstances.
One of the main reasons is when the borrower is struggling with the interest charges on a raft of credit cards, overdrafts and other loans. The repayments on all of these can form a sizeable chunk of your monthly budget. For some who have been relying upon borrowing on 0% introductory offers, when these expire, the sudden rise in interest payments can come as a nasty shock and may be overwhelming financially.
Overwhelmed by credit card debt?
If you are in this situation, it might feel hopeless. You may feel overwhelmed because you may only be able to afford the minimum monthly repayments on your credit cards. But only ever making the minimum repayments on your credit cards can cause significant long-term pain. If, as with many credit cards, the minimum repayment is just 2% of the total balance, then you will be incurring significant interest charges. If you have total credit card debt of, say £20,000, then you may be incurring interest charges of close to £290 every month.
If you continue to only make the minimum repayment each month, then it may take you 917 months or 76 years to pay off all of your balances. Perhaps you are young, but think about it: even if you are 20, then it won’t be before your 96th birthday before you have repaid your card debts and, in all likelihood, these debts will outlive you. You’ll also be leaving yourself at the mercy of sudden rises in interest rates.
Perhaps you are already falling behind with repayments and are facing extra penalties from your lenders, looking at potential problems with your credit record and default notices.
In either of these cases, taking out a personal loan can make good financial sense. You’ll potentially be able to cut the amount you have to repay each month, reduce your interest charges and make substantial inroads into your debts with a properly managed repayment schedule. Using a personal loan in this way is often referred to as debt consolidation and is an option for a large number of people including, in some circumstances, those with poor credit records.
Personal loans are not secured against property and there’s no requirement for the borrower to find a guarantor to guarantee the repayments. If you have a poor credit record, then you might find it difficult to get a personal loan from one of the major high street banks but, fortunately, there is a huge market of other lenders who are able to offer personal loans to people with impaired credit.
Transferring your borrowing
If you are planning to use the personal loan to consolidate your existing debts, then it’s simply a matter of transferring all or most of your borrowing – credit card balances, overdrafts or other loans – onto your new loan. Once done, this will mean that you will only have one monthly repayment and a single interest rate to worry about. It will also mean that you have a definite end date when all your borrowing will have been repaid meaning that you’ll be able to concentrate on sorting out the rest of your household budget.
It’s important that you then close you credit card accounts that you have used the personal loan to pay off to prevent you succumbing to temptation and going on a spending spree. If you are going to use your new personal loan to pay off any other loans, then you should check that there are no early repayment penalties or other hidden charges that you might run into when trying to pay back the loans early. Remember to include these in your calculations when planning how much to borrow.
You may not have to put your house up as security or find a guarantor to take out a personal loan but, as with all borrowing, you should use it responsibly. Taking out a personal loan makes financial sense if you religiously make all of your repayments on time. If you don’t, you may incur additional fees, penalties and default charges. In cases where a borrower gets into serious arrears, the lender will be within its rights to take that person to court to recover any money owing.
For those who are committed to sorting out their finances, then a personal loan can make sound financial sense. You will only have one repayment to worry about each month and, more importantly, you’ll be able to plan ahead, confident that you won’t face any nasty surprises provided you don’t fall into arrears. This will allow you to concentrate on your other expenditure and make the savings necessary to get your finances back under control.
Article provided by Mike James, an independent content writer working together with Solution Loans, a technology-led finance broker established many years ago to advise clients of their most suitable types of credit.