repay loan

When paying off your debt, the last thing on your mind is using another loan to repay the other loan. Namely because this will lead to more credit; with that said, no one wants additional debt and the stress accompanying it. So should you pay off debt with a loan? However, this is not always the case, with several obligations to repay, each with its terms, varying rates, and fees. Most people wouldn’t consider the benefits of taking out a personal loan to consolidate several debts as the possible solution for you to solve your money troubles. When looking to use a loan there are certain factors to consider when using a loan to pay off debt.

What are the benefits of paying off debt with a loan?

Below you will find a list of benefits of using a loan to pay off outstanding debts.

Reduce the number of loans to be repaid.

With several loans to repay each month, such as credit cards, clothing accounts, car instalments, and other lines of credit. This may lead you to make multiple monthly payments, resulting in additional costs from the interest rates and admin fees. Though when you use a personal loan to pay off and eliminate outstanding debt, fewer accounts will need to be repaid.

pay off debt

Debt consolidation

When you use this financial tool, ideally, you are taking several loans and paying them off with a larger loan. The added benefit of debt consolidation is a lower interest rate due to the longer terms of such a loan. You can reduce your monthly payments with fewer loan fees to repay on several debt accounts.

Interest rate

Lowering interest rates is always better, equating to a reduced cost in the long run. The added benefit of a low-interest rate is that these lower costs. The result is money that can be saved and put toward paying off the loan sooner.

Monthly instalments

With a more singular repayment structure, you will find it easier to budget and possibly more affordable for your monthly payments by paying off outstanding debt accounts.

Repayments terms

As with any repayment terms, some may be fixed, but they can be flexible and adjustable in certain instances. This will be dependent on the amount due for repayment.

Credit score

With more affordable repayments, you can make your monthly instalments each month. Creditors will favour those who honour repayments, and timely payments will indefinitely improve your credit score. The benefits of this are lower interest rates and better loan options in the future.

Disadvantages of paying off debt with a loan

Below you will find a list of disadvantages to using a loan to pay off outstanding debts.

Do you even qualify for a loan?

Before you can even be offered a loan, you will be assessed based on your credit score. Additionally, you will be evaluated on other factors such as income expenses and additional debts. This will establish exactly how much of a risk you are to credit providers. Without a respectable credit score, you may not even qualify for the loan based on your previous credit history.

Interest rates

With interest rates, those with a low credit score will be subject to higher interest rates as creditors want to mitigate the risk of offering a loan that may not be honoured and repaid promptly.

Monthly repayments

Your monthly instalments could be higher if not calculated correctly beforehand. This is especially true for those subjected to higher interest rates upon taking such a loan.

Missed payments

Suppose you find yourself in a position where you cannot repay your instalments in any given month. The result is that this could negatively affect your credit score and the possibility of future loans with possible lower interest rates.

Loan terms

The length of time on a loan will significantly impact the loan’s overall cost as longer terms will result in more interest paid.

Early repayments

When looking to get out of debt faster, you may want to pay sooner and more often than required. However, specific lenders will subject you to prepayment fees in such events as lender profit mainly off the interest they charge on the loans they offer individuals.

About Arcadia Finance

Arcadia Finance streamlines the loan process for your convenience. With our service, you can submit a free application and receive loan options from up to 10 lenders. We ensure the trustworthiness and compliance of all our lending partners with the regulations of the National Credit Regulator of South Africa.

Is a loan the best solution for me?

After considering all the pros and cons of using a loan to pay off debt, you may still be on the fence about deciding if this is the right solution. The overall costs will be the number one factor to consider when consolidating debt with a loan. After calculating your options, you must decide whether the loan amount will pay off the outstanding debt. You will also factor in the loan costs and if they leave you with more manageable and affordable repayments each month. Another factor will be what you can repay each month within the confines of your budget.

After performing such loan calculations, you will need to make direct comparisons. This will be between your current financial status and one where you have made a projected cost analysis. If you find yourself further in debt or acquire more overall costs, this means paying off debt with a loan is a poor choice. However, after calculations, you find your overall costs to be less than proceeding to make use of a loan to pay off debts.

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The right way to pay off your debts

When paying off your debts, you may not know where to start. The first step would be to pay off accounts with the lowest balances. When it comes to the larger debt amounts, you will need to repay this amount in larger sums, namely accounts with the lowest interest rates. Additionally, you may need to pay more urgent accounts such as credit cards that do not exceed their limit and have your credit score suffer as a result.

How much do you need?
*Representative example: Estimated repayments of a loan of R30,000 over 36 months at a maximum interest rate including fees of 27,5% APR would be R1,232.82 per month.

Loan amount R100 - R250,000. Repayment terms can range from 3 - 72 months. Minimum APR is 5% and maximum APR is 60%.