Pros and Cons: Debt Consolidation with a Personal Loan
A personal loan in UAE or anywhere else can be used for the purpose of debt consolidation in order to repay multiple debts just with a single monthly payment. This can help in simplifying the debt repayment procedure along with sometimes saving you funds – however, it is not this case always.
It is vital for you to compare the various interest rates and also look out for alternative options for the same to find the one that suits you the best.
If paying off your debt is your main goal, then consolidating your debt by using a personal loan in UAE or anywhere else in the world could help you in managing multiple accounts at a time by transferring them into one single bill.
It is time to face the truth – it can be quite a hassle to make payments to multiple lenders every month. It can also be costly, especially if you are holding debts that charge a high-interest rate. Resorting to a personal loan for debt consolidation can make debt payments simpler and less costly in some cases.
The reason behind this is that a consolidation loan may charge you a lower rate of interest as compared to the accumulated interest charges on the individual debts that you owed. You can consolidate various kinds of debt with a personal loan, but before that, you will want to find out if it is a suitable option for you.
Various Ways to Consolidate Debt
There are several ways that allow debt consolidation, such as:
A personal loan in UAE or any region for that matter is issued by banks, online lenders, and credit unions. These funds can be used for a variety of purposes for anything you would like, including repayment of your existing debt. Your credit score, along with factors such as income and other financial details will determine the rate of interest charged to you.
The repayment timeline is defined upfront, and for many lenders, there is a time period that ranges between 3 to 5 years. Most of the personal loans in the market are unsecured i.e., there is no collateral required against the loan.
Balance Transfer Credit Cards
The balance transfer cards often offer cardholders a 0% interest on balance transfers for a limited introductory period. You may be required to honor a small fee for the transfers you make on the card, but you do not have to pay any interest for the first few billing cycles. Some cards, however, do not even charge this fee.
Depending on your credit line and the policies of the issuer, the amount that you can transfer to your balance transfer credit card is determined. However, one thing to keep in mind is that once the introductory period is over and your 0% promotional rate expires, the interest rates charged can be quite high.
Home Equity Loans
If you are someone who owns a home and also has equity in it, you can borrow funds against your house and consolidate your debt via a home equity loan. The interest charged on such loans is generally lower than that of a personal loan, but in case of a home equity loan, you are required to use your property in the form of collateral in order to secure the loan. This means, if you are unable to pay back your loan, you could end up in a situation wherein you lose your home.
Pros of Consolidating Your Debt with a Personal Loan
There are numerous benefits of using a personal loan in UAE for debt consolidation:
Reduced Interest Payments
Personal loans generally can have lower rates of interest as compared to other types of debt in the market. If you are able to qualify for a personal loan in UAE or anywhere else also and you reduce your rate as well, you will save yourself some funds on the repayment of the loan.
Possibility of Locking-in a Low Interest
Sometimes when you borrow funds, the interest charged to you is variable. This means that the rate is linked to a financial index. If the index rate rises, your rate of interest will rise as well.
If you are fed up with owing funds at variable interest rates, you could opt for a consolidation loan at a fixed rate of interest so that you will know your exact monthly payment.
Fixed Repayment Timeline
When you opt for a personal loan, you are agreeing to repay the funds on a set timeline that is specified in the loan agreement. Because you have your loan agreement at hand while going in the debt, you will know exactly when you will be free of debt considering you make timely payments.
Also, bear in mind that if you repay your loan early, the lender may end up charging you a prepayment fee.
Potential Boost In Your Credit
Your credit score is determined by a variety of factors that have different weights. For example, if you are not able to pay your credit card dues on time, this can have a negative impact on your payment history which is an important factor contributing to your overall credit score.
If you have completely exhausted the credit available on your credit card, then this will end up hurting your credit utilization ratio – measures the credit used vs. total credit extended to you. A lower ratio can help in achieving a good score.
Debt consolidation via a personal loan can help in having a positive impact on your credit score but only if it leads to a lower credit utilization ratio and timely payments.
Cons of Consolidating Your Debt with a Personal Loan
There are also some potential downsides to keep in mind before you choose to opt for a personal loan in UAE for debt consolidation:
May Have to Pay a Higher Rate
There is no such guarantee that a personal loan will for sure have a lower rate of interest as compared to all the debt that you have piled up to pay off. If you consolidate your outstanding debt with a lower rate of interest, you may raise the cost of repaying it. It is good to make a debt repayment calculator in order to compare your potential savings.
End Up Paying More Interest
Even if you manage to obtain a lower interest rate, there is a possibility that your personal loan could end up costing you more due to a stretched repayment timeline. For example, if you use a personal loan that has a repayment tenure of 5 years when otherwise you would have repaid the outstanding debt in 2 years, you will be paying interest for a longer period of 3 years. This means you will be paying more interest over the course of time, depending on the rate charged on your loan.
Potential Fee and Charges
Sometimes you are required to pay some amount in order to take out a personal loan. Depending on the loan provider, you could find yourself in a situation where you will end up being charged an application fee, origination fee, or even a penalty for prepayment of your loan.
These fees and charges associated with a personal loan may end up making debt consolidation more costly as compared to just paying off your present lenders.
Assets May Be At Risk
Some personal loans in the market may require you to secure them. With these types of loans i.e., secured loans you will be required to put certain assets as collateral against them. The lenders can take away these assets if you are unable to repay your loan as promised.
If you have taken up a secured loan to repay the debt that was unsecured, you are putting your collateral at risk which was not the case before. If you do not pay back the loan, you will end up losing your asset that is on the line.
End Up With More Debt
When you clear the debt that is outstanding on your credit card using the funds obtained via a personal loan, you are freeing up your line of credit. If you end up using the cards again and you fail to pay back the outstanding amount, you could end up in a situation where you owe money to the original creditors again. But, this time you will have to pay off your consolidation loan along with quite an amount of new debt and it will leave you in a worse situation.
The Bottom Line
It can be a good idea to opt for debt consolidation with the path of a personal loan only if you can manage to obtain a lower rate of interest and favorable terms as compared to the debt you are holding currently. Whether you qualify for such a loan will depend on your income, credit score, and other financial details.
But, if you do qualify, ensure that you understand the terms of the loan, have a proper plan in hand to repay the loan, and get control over your spending so that you do not end up in a situation where you are deeper in debt. If the conditions are right, it can be a good tool to consolidate your debt to help you reach the milestone of being debt-free quicker.