Paying Off Debts With An Installment Loan?
Anyone who has to repay a large number of smaller loans quickly loses the overview and runs the risk of falling into a debt spiral, from which it is usually quite difficult to escape. Especially if the loans differ significantly in their conditions. In such a case it can make sense to combine all the old loans and redeem them with a new loan. But what are the advantages of such a procedure?
Anyone who is toying with the idea of taking out an instalment loan to pay off outstanding debts is basically doing nothing more than rescheduling. Whether this is worthwhile depends on the individual case. It can certainly make sense if you have to pay lower interest on the new loan than on the outstanding debt to be repaid. So in order to pay off possible credit card debts or an overdraft facility, an instalment or personal loan is often the better choice. It is true that taking out a further loan can also have negative effects on your creditworthiness. However, it can also be advantageous to pay off existing debts with an instalment loan.
Why it can make sense to take out a loan to pay off debts
If you have difficulty paying your installments regularly or if full repayment is unlikely due to high fees and interest rates, a personal loan with a lower interest rate can be a good solution to pay off credit card outstanding debts in full, for example. A loan with lower interest rates could reduce the monthly instalments and thus the financial burden.
This is an important factor for many consumers who have problems paying on time. After all, smaller sums can make it easier for them to meet payment deadlines. At the same time, they have more money left with which to service the new loan and thus pay it off faster.
What you should bear in mind when seeking debt restructuring
Before deciding on a debt rescheduling or a debt settlement by new debts, one should take a close look at the contractual terms. Not only the annual percentage rate of charge should be considered. Also the term of the new loan. Although the payments may be lower than with the initial loan, it could take longer to pay off the new debt, depending on the contract details at maturity. Lower interest rates with a longer term can be more expensive for the borrower in the long run, but at the same time it can keep the Schufa score and creditworthiness in check because the smaller loan instalments are paid regularly.
Private or instalment loans can be a helpful instrument to improve one’s creditworthiness and the Schufa, which has at least suffered until the debt restructuring. In the same way, they can provide some relief in the event of unexpected bottlenecks or major purchases. But because nothing is free in the world, one should know the costs and risks that such a loan involves in case of doubt. Pro and contra lists can make decision-making quick, clear and above all more rational. Anyone who is thinking of redeeming open liabilities with another or different one should first consider their own behaviour in financial matters. Only then does an installment credit for debt reduction really fulfil its purpose.