Dubai: Although owing money is not always bad, it turns bad when you owe money you cannot pay back. And if the amount of money you cannot repay keeps snowballing, you need a plan.
“Borrowers deep in debt use many strategies to get out of debt,” Dubai-based debt advisor Mirin Raul said, while adding that one of which involves applying for ‘balance transfer’ cards.
“Some people use balance transfer cards to successfully pay down debt, but others simply make the minimum payments and never make real progress against their debts,” added Raul.
“Those usually end up exactly where they started once their card's introductory offer ends — with plenty of debt and a crushingly exorbitant interest rate. However, there may be a better, more predictable way out of debt, however, and it involves a personal loan.”
How a personal loan can help you climb out of debt
Applying for a new loan to work your way out of debt may go against common logic, but there are reasons a personal loan can work. For starters, these loans come with low fixed interest rates that never change. Second, they have repayment schedules that tell you exactly when you'll become debt-free.
Because personal loans have fixed rates and fixed repayment terms, you also have a fixed monthly payment that stays the same. This is much different from the way credit cards work since your payment will change based on your annual interest rate and how much you owe.
“With a personal loan to pay down debt, you know exactly what you're getting into. You know how much you'll need to pay each month, when your loan will be paid off, and what your interest rate will be the entire time,” added Raul.
“The best part is, a personal loan is not a line of credit you can borrow against. So once you use your loan proceeds to pay off and consolidate your credit card bills, you won't have the option to use your loan to rack up more debt.”
With a personal loan to pay down debt, you know how much you'll need to pay each month, when your loan will be paid off, and what your interest rate will be the entire time
How to take a personal loan to pay down costly debt
If your goal is getting out of debt this year, a personal loan could be exactly what you need. But you'll be in the best position to help yourself if you go about repayment the right way.
• Compare personal loan offers
Because there are so many options to get a personal loan, your first step is shopping around to compare offers in terms of their interest rates and fees. The best personal loans come without an origination fee, any application fees, or any other hidden fees.
Outside of application fees, many reputable lenders charge origination fees — or fees assessed to originate your loan. These fees can vary by lender and even with the same lender depending on your credit score and other factors. They can even be as high as 8 percent of your loan amount, which is a lot.
• Create a spending plan
“Once you've shopped for a personal loan, you'll have an idea of your new monthly payment. At that point, it's crucial to create a monthly budget or spending plan to ensure you can stay on top of your new loan,” said Dubai-based wealth advisor Mohammad Shaan.
“Figure out exactly how much you earn and how much you owe, including your new personal loan, housing costs, and other bills. From there, look for ways to reduce your spending. Ensure you have a grasp on how much you can afford to spend each month while keeping up with all your expenses.”
• Stop using credit cards till debt burden eases
Paying off your credit card debt with a personal loan can put you in a precarious position where you're tempted to start using credit cards again. But if you start using credit, you'll likely rack up even more debt balances you'll have to pay off, noted Shaan.
“Your best bet is putting your credit cards away for safekeeping and sticking to cash or debit instead. To get out of debt — and stay out of debt — you must learn to live within your means. Not using credit cards is the only way to ensure you're living a lifestyle you can actually afford.”
Verdict: Should you get a personal loan to pay off high-interest debt?
In an ideal world, no one would recommend taking out a loan to consolidate and pay off debt. However, the reality is there are times when borrowing money is the only way to dig your way out of a deep debt hold.
This is mostly due to high interest rates on credit cards. With the average credit card annual interest rate (APR) at 16.35 per cent as of March 2022, borrowers are stuck paying significant sums of money in interest.
Once you've shopped for a personal loan, you'll have an idea of your new monthly payment
“When paying credit card dues, most of those who fall into traps end up letting most of their money go towards incredibly high interest payments,” added Shaan.
Hardly any of their minimum payments goes toward paying down their credit card balances — and that’s if they can stop using credit cards for purchases. At the end of the day, these challenges are the reason many people consolidate their credit card debt with a personal loan with a lower interest rate.”
While choosing to consolidate debt with a personal loan does mean you’re trading one kind of debt for another, this strategy comes with considerable advantages — at least for people who can qualify for a personal loan with affordable interest rates and fair terms.
