Paying off a debt can take a long time and require a lot of financial sacrifice. But there may be a way to make paying off debt both cheaper and easier. In many cases, taking out a personal loan to refinance and consolidate your debts could be just the ticket to lowering your costs and simplifying the reimbursement process.
Here’s how to cut debt repayment costs with a personal loan
Personal loans can help lower the total cost of paying off your debt if you are able to borrow money at an affordable interest rate and use the loan proceeds to pay off other creditors.
If you can claim a Personal loan that has a lower rate than your current debt, refinancing with this personal loan is often a smart decision. The lower the interest rate you pay, the less your creditor takes from your payment each month, even if you don’t reduce your principal balance. With more of your money devoted to principal, your balance drops faster, even without making larger payments.
Refinancing with a personal loan can also allow you to merge multiple debts, giving you one lender to pay instead of many. This eliminates a situation where you have to decide which loans to prioritize paying extra money each month. Many people use a debt snowball method repay loans, which involves paying off small debts first in order to stay motivated, even if those debts are at higher rates. While there are psychological benefits to this strategy, it may mean paying off debt is more expensive down the road.
If you’ve refinanced several existing debts into a personal loan, you won’t have to choose the order in which to pay them off – and it could cost you money if you choose the snowball approach. Instead, your single monthly payment will simply serve to reduce your total debt balance since all of your existing loans will be combined into one.
Will this approach work for you?
Debt refinancing using a personal loan can undoubtedly help you save money in most situations, but not in all situation. This technique may not work for you if:
- You cannot qualify for a new personal loan at an interest rate lower than your current rate. If you were to raise your rates, you would make borrowing more expensive, and this approach would eventually backfire.
- You are living beyond your means. If you use a personal loan to pay off other debts, such as credit cards, there is a risk that you will recover your card balance after freeing up your line of credit. This could leave you with double the debt, since you will have your personal loans and your new balance on your card to pay. Therefore, you do not want to refinance until you are sure you can do so responsibly and living on a budget who controls your spending.
- You plan to refinance a loan with a much longer repayment time. If you extend the repayment period of your current loans, it could become more expensive to pay them back, because you will be paying interest for longer. Paying interest for months or years longer could increase borrowing costs, even if your new loan lowers the rate on your current debt.
Outside of these situations, a personal loan is often a great tool for reducing debt repayment costs. It’s worth considering whether this strategy might work for you.
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