Switching your credit card debt for a personal loan might just be a clever choice. How so? Many personal loans offer interest rates that are more appealing than credit card rates. So, you stand a chance to save on interest and potentially settle your debt faster.
Have a look below to understand the pros and cons of using a personal loan for debt consolidation, and also discover alternative solutions you might consider.
Why Consider a Personal Loan for Credit Card Debt Consolidation?
Applying for a personal loan to settle credit card balances can be a good move when in the right circumstances. Let’s understand why:
Competitive Interest Rates
Compared to credit cards, personal loans generally boast better interest rates. Got a decent credit score? You might just get even a better deal. By shifting your credit card debt to a personal loan with a friendlier rate, you stand a good chance to get savings on interest.
However, it’s worth noting that many lenders set their starting loan amounts between R 5000 and R 25000. If your debt doesn’t quite measure up, a personal loan might not be your best bet.
Reduced chance of missing a payment
Consolidate your credit card balances and say goodbye to the hassle of multiple monthly payments. By shifting all your card debt into a personal loan, you’re left with just one fixed monthly payment. This not only streamlines your finances but also minimises the risk of forgetting a payment. Remember, missed payments can take a toll on your credit score. So, make life simpler and safeguard your credit at the same time.
Boost Your Credit Score with Personal Loans
When you apply for a personal loan, there’s a good chance you’ll face a hard inquiry. This might give your credit a little knock at first. However, over time, a personal loan can actually work wonders for your credit in two main ways:
- Diversify Your Account Types: Having a mix of different account types, like loans and lines of credit, can enhance your credit scores. It’s all about showing that you can manage various forms of credit responsibly.
- Optimise Credit Utilisation: If you use a personal loan to settle one or even several credit card debts, you’re essentially improving your credit utilisation. This is the ratio of your total credit card balances to your overall card limits. Aim to keep this ratio under 30%. The lower it is, the better it is for your score.
The Pitfalls of Using a Personal Loan to Clear Credit Card Debt
Your monthly payment might get higher
While a personal loan might offer a more attractive interest rate compared to your credit cards, it could lead to a heftier monthly commitment. Here’s the thing: with a fixed-rate personal loan, you’re committing to a consistent monthly payment for a certain duration. This amount might be more than what you’re used to with the minimum payments on your credit cards. This could mean a bigger slice of your monthly budget goes towards this repayment.
Beware of increasing your debt!
When you keep swiping those credit cards after securing a personal loan, you’re just piling on more debt. Before saying ‘yes’ to a loan, double-check that the monthly instalment won’t strain your budget. And importantly, have a plan in place to not all the time use those tempting cards.
If you’re considering a personal loan, it’s crucial to do your due diligence. Start by checking your credit scores and comparing loan rates. Always read the terms and conditions, and keep an eye out for hidden fees.
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Loan amount R100 - R250,000. Repayment terms can range from 3 - 72 months. Minimum APR is 5% and maximum APR is 60%.