How Personal Loans Can Reduce Your DebtBy Caitlin in Posts
Personal loans are increasing in popularity as a way to consolidate debts as Australians begin to shun credit cards and their high interest rates. Personal loans – or even cash loans or fast loans – can usually be organised easily over the internet with payment being made into your bank account in only a couple of days.
It is an attractive option for people who want to get their finances in order, but it only truly works if the borrower takes an honest look at their spending and financial habits. So don’t max out your credit card as soon as you make use of a personal loan, because all it does it put you back to square one.
How debt consolidation works
Debt consolidation using a personal loan is a relatively simple concept. Let’s say you have a credit card debt of $1000 and are paying off a new TV worth $1500 through store credit. The interest rates on those debts are going to be high, and if you don’t watch your finances it can start to get very difficult to meet the repayments, especially as the cost of living continues to rise.
By using a personal loan you can pay off those debts with a much lower interest rate. So you can apply for a personal loan of $2500, use that money to pay off the credit card and store debts, and then have just the one repayment to make that doesn’t hit your hip pocket as hard.
The advantage of personal loans
One of the biggest attractions of personal loans is affordability. Lower interest rates means lower repayments. It can often be quite straight forward to be successful in applying for a personal loan as many lenders have simplified the process – it can even be done online. You will have to meet certain criteria, such as having a good credit history and a regular income. Personal loans are also attractive because they have a fixed term to be repaid in, and you know exactly how much it is going to cost you over the life of the loan, which is usually quite short.
Personal loans versus credit cards
Australians no doubt have a love affair with credit cards with billions each year slapped on the plastic. But with those credit cards come much higher interest rates than any other form of lending. According to research group Canstar CANNEX, consumers are waking up to this as there has been a significant shift away from credit cards to personal loans.
‘Statistics reveal that more and more people are choosing the safety and value of a personal loan over a credit card,’ Canstar CANNEX stated in a star rating report. ‘People are continuing to roll multiple credit card debts into one simple personal loan – a positive sign that real efforts are being made to reduce personal debt in a disciplined manner, rather than chipping away on credit card repayments yet constantly fighting the credit card’s ongoing spending temptations.’
This shift can have significant savings. A $2000 credit card debt, which charges around 18% interest, can incur around $1200 in interest charges over three years. A personal loan at around 10% over the same period will involve paying around $320 in interest – that’s a saving of almost $900. Therefore it really does make sense to consolidate your debt, by using a personal loan. It really is a great way to reclaim your finances, and get yourself out of debt.