Personal loans are loans that can be used for any reason. When you get a personal loan, you can use the money to work on a home maintenance project, pay for a medical procedure, or even for debt consolidation. Getting a personal loan to put several debts together into one monthly payment can simplify the process and save you money as well as lower your interest rate, but it’s not always the best option available.
Before you jump and get a personal loan to consolidate your debts, you will want to research options and find the best choice for your situation.
Guide To Debt Consolidation With A Personal Loan
Pros of Debt Consolidation Through Personal Loans
If you want to work on debt consolidation and the personal loan sounds like the right option, there are many benefits to the process. First, you could definitely reduce your overall interest rate. Credit card interest rates are generally very high and you might be paying the minimum on those cards each month to get by with your budget. If that is the case, you are just paying for the interest and not actually paying down the cards. That can raise your debt over time instead of lowering things. When you get a personal loan with a low-interest rate, you can save money monthly, and on loan repayment overall.
Second, you finally have a timeline for your repayment. You have a plan in place. Credit card bills can cycle endlessly, but when you pay those off in favor of a personal loan, you have a timeframe on that loan. You get to see the amount go down on a monthly basis and have a date in mind in the future when you will become debt free and clear of the bills you consolidated under the loan.
Third, when you get rid of all of the little debts and put them into one personal loan, you are going to boost your credit card. Every time you make a payment on your personal loan reliably and on time, you are going to have a positive effect on your credit score. You won’t have a ton of credit cards to keep up with and instead, it’s a lot easier to make the one payment, which will show you can handle credit in a positive way.
Cons Of Debt Consolidation Through Personal Loans
Before you decide on debt consolidation with a personal loan, you need to know all sides to the story. There are some downsides that you should consider before you go this route.
First, you might end up paying higher interest rates than you would with credit cards. While many personal loans have lower rates, you might get in on a loan that charges high rates so you need to really watch that. You also need to do some calculations and make sure that even if the interest rates are lower, you don’t end up paying more over the time period of the loan.
Second, there could be fees that you have to pay in order to take out the personal loan, depending on the lender. They might charge you application fees, originating fees, or even prepayment fees if you decide to pay the loan off earlier than agreed upon. Those fees, if they exist, can make your debt worth more in the end than it was originally and you don’t want that, either.
Third, having a personal loan with a secured background means that assets you own are going to be collateral. If something happens and you are unable to pay for the loan, your assets are at risk and that might be worrisome for you.
And last, when you take out a personal loan to work out debt consolidation, you open up your line of credit and you might start using your cards again. That can throw you into an even larger debt than you had before.
Inspect the options with care before you go for a personal loan for your debt consolidation and debt relief.