Getting a loan to reduce your debt seems like backward logic. Multiple credit cards or expensive student loans may have put you in the red in the first place, so making another promise to pay later won’t sit right with you. However, a loan may be a good option if you have a steady source of income. Debt consolidation or home equity loans both have risks, but they may lead to lower interest rates. A key factor in the success of preventing new debt with a loan is amortization.
If you get an amortized loan, you will receive a payment schedule. You will notice that each monthly payment is exactly the same. The interest has already been factored into the payment plan, meaning it is not compounding like credit card rates. Therefore, if you know the number you need to pay each month, you can compare with the rest of your budget and try paying more than the minimum. If you can pay more than the minimum, not only will the loan’s term be shorter, but you will also end up paying less interest than if you made just the minimum payment each time.
I can’t talk about a financial topic without also telling you about the risks involved. Home equity loans and car loans are secured debts. If you default on these debts, you’re at risk of losing the property. Home equity is not a popular item to hold as collateral right now because most homes are not increasing in value. It’s highly likely that unsecured loans are the bulk of your personal debt, and a secured loan could have more severe consequences if you default on it. On the other hand, consolidating your credit cards is an unsecured debt. Because there is no collateral on an unsecured loan, this will almost always entail a higher interest rate than a secured loan.
The purpose of getting a loan to reduce your debt is to be current on your payments. If you can’t handle a new loan, there are some other strategies you can use. With multiple credit cards, you can tackle the one with the highest interest rate by paying more than the minimum until the balance is back down to zero (while still also making payments on the rest of your cards). You might also consider curbing your budget by eating at restaurants less often or taking public transportation to save up on money for gas. Finally, you may consider getting a new part-time job to increase your income. A new loan might not be the best option to lower your debt, so look at alternative options. If you do get a new loan, make sure it’s amortized, and make all payments on time.
He played clarinet for the Marching Tar Heels in 2005 and 2006. He also volunteered for STV, the student-run television station at UNC-Chapel Hill, in the spring of 2010. He shot video, wrote scripts, and acted for “Off the Cuff,” UNC’s longest running sketch comedy show. He has the rare distinction of having lived in a dorm all four years of his undergraduate college career. He was also on Franklin Street on the night of April 4, 2009. His future plans are to pursue a master’s degree in journalism and to one day work for the media as a sports journalist or broadcaster.
Being one of eight children, David realizes finance is an important topic to everyone, regardless of his/her knowledge of the subject. His interests are in personal finance, budgeting, and savings.
In his spare time, David enjoys watching sports and standup comedy, as well as doing crossword puzzles and writing in the first person. He also thoroughly enjoys trivia and, one day, hopes to participate on the game show Jeopardy!, where he will try to break Ken Jennings’ 74-game win streak.