Obtaining a loan is the definition of taking on debt, so the idea of using one to get you _out _of debt instead might sound crazy to most people. But there’s something most people don’t know — you can often lower your interest rates and make it easier to stay on top of payments to multiple lenders by taking on a personal loan for debt consolidation.
If you’re wondering what on earth debt consolidation is and how you can start taking advantage of this new hack, you’re in the right place. We’ll break it all down for you, along with some special insider tips and where to find the right lender.
What Is A Personal Loan For Debt Consolidation?
As you’re probably aware, a personal loan is a borrowed sum of money that can be used toward any personal (non-business) purpose. Typical uses include big purchases like vacations, weddings, or cars — but you can also use them to consolidate your debt – for example, student credit card debt and student loans.
“Consolidating” debt means combining multiple loans in one place so you only have one lender to pay at once — not two, three, or even ten to stay on top of.
As a result, you might be able to pay off your debt more quickly or rack up less in interest — more on that later.
How Does The Process Work?
Personal loans for debt consolidation are pretty simple to understand. Simply go through the usual loan application process and make it clear what you want to use the money for — then, the lender will arrange the consolidation process with your previous loan provider(s).
As always, whether or not you qualify for a personal loan (as well as the loan term and interest rate you get) depend on your credit score, income, and other factors related to financial history.
Pros and Cons of Using A Personal Loan for Debt Consolidation
We wouldn’t be writing this article if we didn’t think taking out a personal loan for debt consolidation was a good idea — but that doesn’t mean there are no drawbacks. For the sake of impartiality, let’s take a detailed look at both the pros and cons.
The clearest advantage of using a personal loan to consolidate debt is the chance of a **lower interest rate — **a debt consolidation loan allows you to shop around and get a better deal than what your current loan(s) offer, which will save you money.
Even better, if you currently have a loan with a variable interest rate, consolidating your debt gives you the chance to switch to a fixed rate, allowing you to lock the interest rate in. No more worrying about your interest rate changing every month — although there’s still a chance of the interest rate changing.
Plus, you’ll have a much clearer debt timeline. Instead of having a different schedule for every loan, you can have a fixed date to pay back everything you owe. This makes it far easier to know exactly when you’ll have enough spare cash to take that cruise, vacation, or go on a massive shopping spree!
In some cases, a personal loan for debt consolidation could even end up improving your credit score. Sometimes, borrowers who have various loans end up missing their monthly payments, which hurts their credit score. And when you use debt consolidation to clear your lines of credit, you’ll be using less of your available credit, which is one of the metrics that determines credit score and credit history.
As you might have figured out already, the advantages outlined above don’t apply to everyone or all circumstances.
If you already have a cracker of a loan (yes, such things exist), there’s no point in consolidating your debt just because you can — this could actually lead to a higher interest rate.
Or, just as bad, you might pay more interest over time if you consolidate your debt into a loan plan with a longer term — even if the interest rate seems lower, it will add up more over time.
Somewhat counterintuitively, a personal loan for debt consolidation can sometimes make it easier to rack up more debt. Why? Many people opt for these personal loans because they’ve used up all their available credit already, but debt consolidation will make those lines of credit available again, possibly leading to more debt. Proceed with caution!
There’s also the possibility of additional fees — including origination fees, application fees, and prepayment fees.
Where To Take Out A Loan
As with other types of personal loans, potential borrowers have a choice between traditional banks, credit unions, and online lenders.
Many inexperienced borrowers tend to go for traditional banks to take out loans since they have recognizable brand names and great service, but unfortunately, the interest rates tend to be higher.
Meanwhile, online lenders tend to offer lower interest rates, but they take a no-frills approach. That means no going into a local branch if something goes wrong, and customer service is likely to be more pared down.
Credit unions are cooperatives; since they operate on a not-for-profit basis, they aim to offer their members better rates than they could find elsewhere. Sounds like a dream come true, right? There’s just one caveat — you might not be eligible. Most credit unions have particular membership criteria, such as working for a particular profession or living in a specific area.
The lender you go for will ultimately depend on where your priorities lie. Do you want customer service and the option to go into a branch? Or the lowest rate possible, whatever the cost?
Show That Debt Who’s Boss
Whether you’re already on the phone with a lender to sort out the best personal loan to pay for debt consolidation, or you’re taking a while to do the calculations first, debt consolidation is certainly a useful trick to have up your sleeve.
Whatever you decide, one thing is for sure. If you’re currently struggling with debt, you need to take action!