About one-half of all Canadian households are carrying a credit card debt with an average balance of $10,000. If you are among these Canadians, then you are probably paying way too much interest for your loan than you should. In this article, we shall help you understand some of the pros and cons of using a personal loan to pay off or consolidate your credit card debt. Many debt-strapped Canadians have turned to personal loans as a way of consolidating their debts
and reducing the interest rate costs.
There are two major types of personal loans namely; secured and unsecured personal loans. The idea behind using a personal loan in Canada to pay off your credit card debt is to get a loan with a lower interest rate than what you are paying on your credit card and also a defined repayment period.
Pros of Using Personal Loans to Consolidate Your Credit Card Debt
One of the most significant advantages of this approach is that you will be paying a lower interest rate. Let’s say that you have a $5,000 balance on your two credit cards. If one card charges you 20 percent and the other 15 percent, paying them off with a personal loan that charges 9 percent will save you a lot of money. Keep in mind that higher interest is the leading reason why most people stay in debt longer than they should.
This also means that you get fixed terms on your new personal loan such as paying eight percent for two years with monthly payments of $500. As long as you remain disciplined and make your monthly payments on time, you may end up paying your loan within a short period.
The other benefit of consolidating your credit card loans with a personal loan in Canada is that you will have a single loan and payment to focus on every month. For instance, you won’t have to worry about the various payment debts and amounts. Also, making a single payment every month instead of several will help you stay on track and organized with your bill payments.
You can also reduce your monthly payment when you use a personal loan to consolidate your credit card debts. For example, if the total minimum credit card payment is $700 and your new personal loan payment is $500, you will have an additional $200 each month to pay down your loan balance even faster.
Cons of Using Personal Loans to Consolidate Your Credit Card Debt
Taking a personal loan to consolidate your credit card debt also has some drawbacks and the most significant one being that you may also be required to pay a fee which makes the whole process expensive. Some companies charge a fee of up to six percent of the loan amount. For instance, if you borrow $20,000, you may pay up to $1200 which can make the personal loan expensive even if the lender offers you a lower interest rate.
There is still a possibility of making higher monthly payments. Although the monthly payments of your personal loan may be lower than the sum of all your minimum credit card payments, it can also be higher. The monthly payment will largely depend on how much you borrow, the loan length, and the interest rate.