Personal loans are useful when the situation requires them and make it possible to deal with specific expenses, such as a new car, furniture, or home renovations; they can also be used to consolidate other debts. And since we regularly have demands placed on us and our consumer society requires it, it may seem easy and convenient to ask for an extension of your personal loan to reduce your monthly payments. But is that really the best solution? Here are 4 things to know before deciding to extend a personal loan term.
How a personal loan works
When you take out a personal loan, it’s necessary to make a skillful arbitration between the term of the loan and the amount of the payments, the idea being to repay it as quickly as possible in order to free yourself from debt and reduce the financial expenses as soon as possible, while not having to handle an excessive monthly payment. But since the rates associated with personal loans are often as high as 20 or even 35%, it’s best to think twice before asking for an extension of your personal loan. Because extending a personal loan term means reducing the monthly payments, but also substantially increasing the interest on the loan. However, it’s always helpful to know that, depending on the lending institution, and if necessary, it’s usually possible to defer:
A payment to the end of the term twice a year for a fixed-rate loan
A payment over an entire term in the case of a variable-rate loan.
Savings: an effort rewarded
If you are considering extending your personal loan term in order to take out another loan which will be used to treat yourself to new items that aren’t absolutely essential or which you can do without for a while, it’s better instead to restrict your lifestyle temporarily and save some money, which will let you finance all or part of the project. And besides avoiding getting even further into debt, you limit costly financial expenses.
Debt consolidation: an alternative solution
Instead of extending a personal loan at a high interest rate, it’s generally best to opt for a debt consolidation loan, which will allow you to:
group together all your debts with high interest rates—such as personal loans, as well as credit cards, personal lines of credit, and even car loans—and take advantage of a lower interest rate
obtain lower monthly payments without necessarily extending the loan term, since a significant difference is generated on each monthly payment thanks to the lower rate.
Renegotiating the loan: an avenue worth exploring
Are the fixed rates of the current market lower than those that were in effect when you took out your loan? Try to approach your lender to renegotiate the rate. There will certainly be some fees to pay, but if you are able to agree on a reasonable new rate, they will soon be amortized, and you will enjoy a lower monthly payment without necessarily having to extend your loan term.
Personal loans are accompanied by rates that may reach up to 35%, which is why you should only rely on them in cases of absolute necessity. And even in these cases, you should still shop around, because there are many solutions for reducing your monthly payments without necessarily extending your personal loan term