For those who want to make a dent in their debts, a personal loan may seem like the deal way to secure money and get ahead with your finances. While the theory may sound right, the logic is just not that simple. Personal loans can give you needed money but the high price you pay to secure that extra cash may only make your debt situation worse.
Why Personal Loans May Not Make Sense
There is a growing number of companies who are targeting consumers with bad debt and low credit scores by offering them personal loans as a way to consolidate their existing balances. There are several issues involved that can make such personal loans a bad decision including:
High Interest Rates
While you can likely secure a loan with less-than-perfect credit, you are going to pay for it. Loan companies offering to help debtors can charge upwards of 40% interest. This means most borrowers will be repaying a lot of extra money than they originally borrowed. This extra cash would be better spent reducing debt balances more slowly over time. Another side effect of personal loans for paying off debts is most lenders require some kind of collateral (ie: your vehicles). If you fail to meet the repayment obligations which can be hard to do when you are already burdened with debt, you risk losing that collateral and getting yourself further in debt.
Low Loan Amounts
While lenders may be willing to offer you a loan, the amount may not even be worth your trouble. A few hundred dollars may be all you are eligible to receive based on your credit history and score (yes, they check) so if the amount you are eligible to receive is too little to make a significant debt in your debts, the loan is not even worth it.
Taking on an additional loan when you already owe so much can be hazardous to an already bad credit situation. Adding more debts on your credit profile will not be to your advantage. Your credit score will likely drop during the credit check and drop even more if you are maxing out your debt to income ratios. Time is the only thing that can heal a credit report so you’ll have to wait several years for the impact to be lessened on your credit report.
Lack of Consumer Priorities
Unfortunately a person in debt who comes into ‘extra’ cash may not be able to resist the temptation of spending elsewhere. If the lender cuts a check to you directly, you may be more inclined to refurnish your home than pay off existing debts. By completely missing the point of a consolidation loan, you are digging a deeper debt hole. Additionally, you’ll likely be dropping your credit score further, leaving little opportunity for more financing in the future when you really need to tackle your debts.
Before you consider a loan to help you eliminate debts, you really need to have focus and put your finances in order to see if it is a reasonable, affordable plan. Remember that you will be adding additional repayment burdens to your monthly budget and you need to do the math to see if it will be more reasonable to pay back debts on a regular schedule without the loan or if the loan will make a significant difference in your battle with debt.