5 Smart Ways to Use a Personal Loan for Debt Consolidation
Excessive high-interest debt like credit cards, payday loans or medical bills can quickly spiral out of control. An effective strategy is consolidating multiple debts into one lower fixed rate personal loan. This reduces total interest paid over time. For best results:
- Calculate interest rates on all debts to identify the most expensive balances incurring the highest costs
- Get a personal loan offer with an interest rate lower than your highest-rate existing debt
- Optimize required monthly payment you can realistically afford
When approved, direct the full personal loan amount toward eliminating your current highest-rate debt first. Celebrate the payoff of that burden! Next, continue making minimum payments on all remaining lower rate debts. Roll the monthly payment amount freed up from the now paid off debt into the next highest rate balance. This debt snowball method maintains manageable payments while eliminating your costliest interest accounts first.
Over time as you pay off debts, your monthly payment stays steady but pays more toward principal as interest costs decrease. Like a snowball gathering speed downhill, the strategy builds momentum eliminating debts faster and faster. The consolidation loan serves as the catalyst optimizing your debt payoff trajectory. Run the numbers to estimate how much faster you can become debt free this way.
Avoid the temptation however to rack up new debts before existing ones are paid off, as this sabotages the consolidation strategy. Also beware of too-good-to-be-true consolidation offers loaded with hidden fees or overly long repayment terms which don’t really improve your situation. Read fine print and get qualified professional advice if unsure a deal makes sense.
Used prudently, a personal loan consolidating dispersed high-rate debts into one payment at a lower fixed rate saves money and eliminates debts far faster than haphazard minimum payments. Automate payments on the consolidation loan to avoid missed payment fees or credit damage. Monitor your credit scores and debt-to-income ratio to track rapid improvements from debt elimination.
Wielding consolidation loans strategically demonstrates financial savvy converting existing burdensome debts into efficient vehicles for becoming debt free. But restraint is required to not fall back into unaffordable spending patterns which necessitated consolidation originally. With diligence and consistent payments, consolidation loans provide a powerful mechanism to repay debts in a more optimized, affordable manner.