Debt consolidation through a personal loan makes sense if you can qualify for a new loan at a lower rate and you have a plan to pay off what you owe. (iStock)
Owing money can be a huge financial burden and it can also be logistically difficult to keep up with multiple creditors if you have several different loans outstanding. If you're tired of sending in multiple monthly payments, debt consolidation through a personal loan could be the solution you're looking for.
When you consolidate debt in this way, you take out a loan from a bank, credit union, or online lender. You'll use the loan proceeds to pay off some or all of your existing debts, depending on how large your loan balance is and how much you owe.
These types of loans are a great tool for debt consolidation because you have flexibility in what you use the loan proceeds for and because you can often borrow at a reduced rate compared with other kinds of debt, such as credit card debt. But while using this type of loan to pay off creditors could both save you money and simplify repayment, it's not the right choice in every situation so you need to consider the pros and cons.
What types of debt can I consolidate with a personal loan?
One of the best things about these loans is that you can use the money you borrow for virtually anything you want. That means you can pay off almost any debt you owe with the proceeds from a personal loan including:
Credit card debt
Medical debt
Payday loan debt
Other loans
However, you want to make sure you're only repaying the debt that has an interest rate above or equal to the rate on your loan. Otherwise, you'd make debt repayment more expensive.
You can visit Credible to find the best loan rates and decide what debt it makes sense to pay.
Is it smart to get a personal loan to consolidate debt?
Using a personal loan to consolidate debt has several advantages including:
Lowering your interest rate. If you qualify for a loan at a favorable rate, your new lender should charge you much less in interest than many of the debts you're trying to pay back.
Reducing your monthly payment. Having one new loan at a lower rate often means your monthly payment goes down, freeing up room in your budget. Credible's loan calculator can help you see how much a loan could cost you. Insert the loan amount you're looking for into Credible's free tool to see what kind of rates are currently available.
Simplifying repayment. If you pay off multiple debts with your personal loan, you'll have just one new lender to pay instead of having to worry about sending several different payments every month.
Making debt repayment faster. When you lower your interest rate, more of your money goes to reducing your debt balance. Unless your personal loan has a much longer repayment term than the debt you consolidated, you can become debt-free sooner.
However, there could also be some downsides, including the following:
You could get deeper into debt. If you repay credit cards using a personal loan and then you max out your newly available credit, you'll end up owing much more money.
You could pay more over time. If you can't qualify for a personal loan at a better rate than your existing debt or if you stretch out your repayment timeline, you could end up paying more.
If you're able to qualify for an affordable personal loan and you have a plan to pay it off in a timely manner, there are generally few downsides -- but you'll need to make sure both those things happen.
See what kind of personal loan rates you qualify for today to see if it makes sense for you.
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What is the best loan to consolidate debt
To get the best personal loan for debt consolidation, you should get quotes from several different personal loan lenders. Compare interest rates, repayment terms, and qualifying requirements to find the lender that's right for you.
Credible makes it easy to find the best personal loan as you can use their online loan marketplace to compare rates and terms from multiple lenders at one time without affecting your credit score.
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What are some alternatives?
While a personal loan is a good option for dealing with your debt, it's not the right choice for everyone.
You have other options, including using a balance transfer credit card that enables you to transfer high-interest credit card debt to a card offering a low promotional APR. In some cases, a balance transfer can enable you to pay off credit card debt at 0 percent interest for a limited period of time.
You can visit Credible's online marketplace to compare multiple 0% credit cards at once to help you determine if a balance transfer or personal loan would be the best way to tackle your debt.
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