PERSONAL FINANCE BLOG

Money shouldn´t stop making your plans come true. Learn how personal loans can help you!
Personal Loans to Pay Off Debt
17 Sep 2018

Personal Loans to Pay Off Debt: The Ultimate Guide

Using loans to pay off debt (of all kinds) can be a clever strategy.

And at a time where US consumer debt has just hit an all-time high of $13.2 trillion, we need all the hints and help we can get.

It might sound counter-intuitive, but taking out money to repay borrowed money can have massive advantages. It’s not just about juggling and moving debt from one place to another without thinking.

A word of warning – it won’t work in all situations. But many people could be better off after consolidating their debts.

It helps you deal with the stress of managing various accounts, as well as often being a cheaper way to repay debt.

Here’s how it works.

What Does “Consolidating Your Debts” Mean?

Consolidating debt is where you combine all your debts into one pot. You do this by paying off your old debts with the new ones. Let’s take a closer look.

  1. Identify the borrowing you want to consolidate.
    It might be credit cards, payday loans, small personal loans, and so on.
  2. Work out how much you need to cover the old borrowing.
    This is the amount you need to apply for.
  3. Apply for a personal loan.
    Find a deal that works for you, and go for it. If you’re successful…
  4. Use the money to pay off all your indebted accounts.
    Now you owe the same amount, but it’s all in one place.

Personal loans are a hugely popular financial product which is widely available.

Talk to us if you’d like to see what our preferred lenders may be able to offer you. Their rates are competitive, which could potentially save you even more money.

The Benefits of Using Loans to Pay off Debt

There are plenty of good reasons to use a loan (or loans) to pay off credit card debt, or even other loans.

Everything in One Place

Having all your debt in one place makes your finances much easier to manage. You don’t have to remember loads of different passwords and account details or keep hold of reams of paperwork.

Cancel all your old credit cards the moment you pay them off, and you’ll only have to worry about this one personal loan.

Easily Track Your Progress Towards Freedom

Because everything’s in one place, you can see your progress very easily.

Set goals for yourself, and reward yourself with something nice (but small – think a couple of drinks out, not a blow-out party) when you reach big landmarks.

This helps to keep you motivated as you move towards becoming debt-free.

Everything at One Rate

In some circumstances, debt might be scattered across different personal loans, credit cards, and other borrowing methods. In those cases, you’re paying all sorts of different rates for the money you’re borrowing.

That makes it a real headache to work out what interest is racking up.

On top of that, each product will have different fees and charges, which you might incur in any given month. It’s difficult to keep track of what’s what.

Plus, if you’ve borrowed a lot of money using credit cards, the rates are likely to be much higher than the rate for a larger personal loan.

Meaning that moving your debt into a personal loan and doing away with the cards will, in many cases, save you money. Which is fantastic news!

There’s no guarantee here though. Be sure to do the math for yourself to see if you’ll be better off. The rates you’re offered may be variable, which means they could change in the future.

You need to decide whether they’re worth the risk, or if you’d prefer going with a fixed rate option.

Be Disciplined, Be Patient

You need a plan to clear your consolidated loan, and that means being realistic. Think carefully about what you can afford to pay, and the other monthly outgoings you need to pay – things like the rent or mortgage, utility bills, grocery shopping, and so on.

It also means you probably need to make a few sacrifices at home in order to pay down the debt.

Eating out a little less often, and treating yourself to fewer takeouts are a couple of common ways to reduce spending while paying down debt. But we’re sure you’ll find loads of little ways to cut spending here and there.

You can then put the amounts you save towards paying off the personal loan.

And remember, when you take out the consolidation loan, the whole point of that loan is to pay off debt. Don’t be tempted to apply for a few extra thousand at the same time. You’re just digging a deeper hole.

Are There Any Alternatives?

Sure. If you’ve got a credit card with a really high balance, you can apply for a 0% balance transfer card. If you’re successful, you can move the balance from the first card to the new one.

The 0% percent period will shield you from interest, giving you breathing space to clear the debt.

This often lasts for at least 6 months, but offers vary from lender to lender and card to card. Plus, after checking out your application, some lenders might decide to not give you the full advertised 0% period.

It’s up to them.

You’ll also have to pay a balance transfer fee to shift the debt. So this method is not free. And you’ll still have to have a plan to clear the balance.

Think About it Before Jumping In!

0% periods can be a great way of clearing relatively small credit card debts.

However, if you have lots of credit cards with high balances, this method is unlikely to work. That’s because you probably won’t be able to find a credit card with a limit high enough to capture all the debt.

And putting the debt on multiple cards just causes a management headache – which you’re no doubt hoping to avoid. Plus, applying for loads of cards at once will damage your credit report.

So while a 0 percent card can be the answer

Is Using Loans to Pay Off Debt Ever a Bad Idea?

As with all financial strategies, consolidating a loan is never just a good idea or a bad idea. It depends on your circumstances.

When Doesn’t it Make Sense?

For example, if you have a small amount of debt on say, each of the five credit cards, it’s probably fairly neutral. You might do better focussing on paying each card off in turn and closing them down.

In that example, you should always remember to pay the contractual minimum payments on each card, even while focussing on one. Otherwise, you can damage your credit report.

As a different example, you might have a couple of personal loans you want to consolidate. Your application is accepted by a lender, but they offer you a higher rate than you’re already paying on the existing loans.

This will make life more expensive, and the convenience of managing a single loan probably doesn’t justify the extra cost.

How it Can Affect Your Future Plans

The other thing to consider is the fact that you took out a loan will be recorded on your credit report.

That’s not necessarily a bad thing by itself, and if you manage the debt well, this can help to improve your credit score.

However, if you wanted to take out a much larger loan or mortgage in the near future, you might scupper your chances by taking out a consolidation loan today.

Because lenders will see that you’ve recently taken out a loan, this may harm your chances of being accepted. They might think you’ll struggle to pay back your existing debts on top of the new one.

It’s Never Black and White

It pays to put some thought into your strategy. Because it is your strategy, for your life. Spending an hour figuring out what’s best for you is a good investment!

Looking to Consolidate a Loan?

If you’re looking for loans to pay off debt, Bonsai Finance can help.

We work with a panel of preferred lenders so that you can easily find loans that suit your needs – small personal loans or large ones..

The lenders will look at your application and let you know how much they could lend you, and at what rate.

If you say yes, they may be able to provide the money very quickly. But we’ll keep you updated after you apply.

But if you want to know a bit more about personal loans before making a final decision, see our FAQs.