In a world where the financial marketplace is becoming more and more diverse, we have plenty of options at our disposal to avail credit. However, at times, it is easy to go overboard and land ourselves in a pile of debt which will need to be paid one way or another. That is where the idea of taking a personal loan to repay your debt comes in the picture.
In this article, we will take a look at the ups and downs of availing a debt to pay another debt, and when it makes sense to make a move like this.
So, is it a good idea to take a loan to clear your debts?
Well, the short answer is no. As far as possible, you should avoid taking a loan to clear another loan. Because at the end of the day, all you are doing is postponing the inevitable - paying back the money you borrowed. You will still need to find a way to clear your dues, even if you have taken a personal loan.
However, there are certain situations when applying for a personal loan
may not be a bad idea, provided you have run the numbers correctly and have a concrete plan. Let’s take a look at some of the benefits of making such a move:
You Get a Lower Interest Rate
One of the main reasons why taking a personal loan to repay your dues is popular in India is because of their low rates of interest. Credit cards and other similar debts are often accompanied by high interest rates - up to 42% or more! Therefore, in the long run, you are paying a lot of interest on your dues, which by itself is quite disheartening. But if you manage to clear them with a personal loan, you pay a lower rate of interest (say 13-15%), depending on your credit score.
However, this comes with the burden of paying a fixed monthly installment every month for the foreseeable future. No matter what you do, you will need to have a fixed amount in your account every month to pay the installment. So, consider this option if you have the bandwidth to meet this requirement.
Your Debts are Consolidated in to One
If you have multiple debts, then a personal loan may do wonders for you. Debt consolidation is where you clear all your dues with a loan and then just focus all your efforts and energy on repaying that one debt only. With all your debts combined into one, you no longer have to track each of your bills. And of course, you may also benefit from a reduced rate of interest.
Things to Remember before Availing a Personal Loan to Clear Your Dues
While this is a plan that can work well for you, you need to consider a few things before getting started.
Work on Your Spending Habits
If you have a problem with credit, then you need to address it immediately. It is, after all, the root of the problem and probably the main reason why you were compelled to take a loan to clear your debts. Until and unless you get a hang of spending your money in a more disciplined manner, tackling debts will be an issue for you.
Remember, while you are paying your personal loan, do not use your credit cards and accrue more debts. It will defeat the whole purpose.
Stick to a Budget
As we mentioned earlier, taking a personal loan comes with its own responsibility, a.k.a, the EMI. Unlike credit cards where you can get away with paying just the minimum amount due (not recommended), you need to pay a fixed amount every month in the case of personal loan. Therefore, you need to have a monthly budget that accounts for this and you must make sure that you adhere to it. You must work on your plans to ensure that you are solvent enough to meet this requirement for the duration of your tenure.
While paying your debts with a personal loan is a feasible option, it needs a lot of financial discipline and a solid plan of action. By consolidating your debts, you focus on one loan only and for that, you need to give your 100%. You should also be sure to carefully understand the terms and conditions of your loan and as far as possible, work with a lender that is well-known in the market.
This option can save you money over time, provided you have a consistent cash flow. At the same time, you must also address the cause of your debt and ensure that it doesn’t happen again.