Using personal loans to clear debt: is it a good idea or a disaster

In an ideal world, no one would consider personal loans as an option for getting out of debt.

 (photo credit: INGIMAGE)
(photo credit: INGIMAGE)
In an ideal world, no one would consider personal loans as an option for getting out of debt. After all, such moves don’t get you out of debt outright; instead, they only compound your debt burden. In the real world, though, people have started borrowing money to dig themselves out of debt and stop bailiffs from coming to embarrass them. In an attempt to become debt-free, people take loans from banks, credit unions, and even individuals to consolidate all of their existing debt, including auto loans, student loans, credit card debt, and so much more.

But is this a good idea or just another dangerous path anyone shouldn’t consider treading? Some may quip. Well, I’d say the perfect answer to that is both a Yes and a NO. Taking personal loans to tackle your debt is as much a logical and excellent decision as it is a dangerous move too. If carefully adopted, personal loans can help you reach your debt-free goals without necessarily feeling the heat of being in debt, but if wrongly adopted, it could signal the start of a financial disaster, as you'll not only have to contend with the burdens of your existing debt, but also with that of the new debt. This then brings us to the question of the day: when is it logical to use personal loans to clear debt? To discover the answer to that, please sit tight and check out the next frame. 

When is a personal loan a good idea for your debt-free goals?

When you can qualify for a lower interest rate

Think about it, does it make sense taking a personal loan whose interest rate is as high as those of the debts you’re trying to pay off? Of course not! If you’re trying to use personal loans to get out of debt, then you need to make sure that you’re getting a loan that comes with a lower interest rate. Unfortunately, when you have existing debt obligations you’re still fulfilling, it can be pretty difficult landing yourself these kinds of loans anywhere. But if you’ve got a decent debt history, coupled with a healthy credit score and report, then there is a high chance that you can still qualify for a personal loan with a lower interest rate. By and large, a personal loan will represent a good idea for your debt-free goals if and only if you're certain that you can lay your hands on a cheaper loan deal.

When it allows you to consolidate your debts into one payment

Allow me to break this to you - if you've taken or planned on taking a personal loan just so you can clear one, or some, of your debts, then it's going to take forever for you to reach your debt-free goal. Why? Well, the reason isn't farfetched; your approach is pretty flawed. Instead of digging yourself out of debt, you're simply replacing one debt with another. My point being? If you’re trying to use personal loans to get out of debt, then you need to make sure that the loan you're taking is not only coming with a lower interest rate, but it is also sufficient enough to consolidate your debts into one payment. That way, you'll be able to focus on just one debt payment every month. Your efforts to become debt-free will only come to fruition if you're able to reduce the amount of interest you're paying on all your debts, and the best way to ensure that is by settling all existing debts with a singular payment that has a lower interest rate. 

When you have the opportunity for renegotiation

Another instance where a personal loan represents a good idea for your debt-free goals is in the event of debt negotiation. Thanks to the establishment of schemes like the Individual Voluntary Arrangement (IVA), debtors have been able to spread their debt payments over a longer period and at a much more comfortable rate. With the help of an insolvency practitioner, you can negotiate a new debt term with your creditors, thereby affording you the time and space you need to pay off your debt. Once the creditor agrees to your terms, you can then take out a personal loan to pay off the agreed amount, with the hope of writing the remaining part of your debt off with an IVA. 

When you can secure a lower monthly payment

If I may ask you, why do you think debtors sometimes default on their monthly debt obligations? Well, the reason is that they are unable to raise enough funds to meet the monthly demands of their debt. Simply put, they don’t have enough cash to make minimum payments monthly. Now, when you’re trying to use personal loans to get out of debt, do you think it makes sense going for a loan whose monthly payment is as high or higher than what you were struggling to pay over your existing debts before? No, it doesn't make sense. Hence, personal loans will only be a good idea for your debt-free goals if it guarantees a lower monthly payment, even though it will inevitably lead to a longer debt term.