One of the most common question is if a personal loan can be used for debt consolidation. Theoretically, the answer is yes. This is because most personal loans allow you to receive cold hard cash, or deposit the money directly to your account of choice. After that, the funds can be used for whatever purpose you deem necessary. Realistically speaking, the answer depends on how much your debts are and the amount of unsecured loan a lender will grant you. As such, the possible exemption is a personal loan via a revolving credit.
The Goal of Personal Loans for Debt Consolidation
This article will discuss several points to consider in order to determine if a personal loan is a feasible means to pay off overdue or soon to be overdue debts via debt consolidation. The author would like to stress that the answer depends (on a case to case basis). But theoretically, yes, there is no law stopping you from doing this.
Define Debt Consolidation
This is a loan payable on instalment to pay off all or some of your overdue debts from the same or different creditors. The debt consolidation loan may come from any of your original creditors. It can also be a new creditor willing to give you the money or assume the debts. This presupposes that the consolidation loan pays for debts of smaller value. The reverse cannot be true.
What Is a Personal Loan?
A personal loan is an unsecured forbearance agreement. The creditor promises to pay for an item in full or to provide a specific amount of cash. In return, the borrower agrees to pay the principal with interest on a pre-arranged date on instalment. The creditor does not require the borrower to provide any security or collateral. The basis for the loan is therefore the personal and financial standing of the borrower.
Important Points to Remember
In order to be feasible, the personal loan must have the following characteristics:
- A loan amount that is enough to pay for all, or at least, several outstanding debts.
- Interest rate that is lower than the average interest rate being paid on all the debts to be consolidated.
- The consolidation loan must comply with relevant laws, i.e. National Credit Act.
- The borrower must actually have the capacity to pay the instalments. Otherwise, he/she will only be substituting several smaller debts which may not even be reported to credit bureaux to a bigger debt that will get reported.
How About 2 or 3 Personal Loans?
If 1 loan is not enough, how about 2, 3, or 4 loans? Theoretically, there is nothing stopping you. Realistically you will have to pay as many interest charges as there are loans. As such, it is a lot better to take out a single loan. If this is not possible, then you need to seriously consider other alternatives, i.e. bankruptcy.
Another alternative would be to apply for repayment. This is with the same creditors you have defaulted or will default on. In some cases, the loan agreement includes a repayment option. Best case scenario, the repayment option is for free or minimal cost. The only setback is most repayment options need to be exercised before you default on the loan.