Personal loans for debt consolidation
Consolidate debts into one loan with more favorable terms.
What is debt consolidation?
Debt consolidation - not to be confused with debt settlement - is just like it sounds. It's a simple way to use a personal loan to consolidate multiple unsecured debts (like credit cards, medical bills, payday loans) into one monthly bill. For example, instead of making payments to multiple creditors, you make a single payment to the lender of the debt consolidation loan instead.
Because personal loan rates can be lower than credit card rates (which have an average of around 15% APR), it's possible to save a lot of money in interest rate payments. By extension, this could help lower monthly payments and/or pay down debt faster.
The best way to compare apples to apples is to get rates that are personalized to your current situation. It's really simple - almost like searching for a flight or hotel.
- Potentially lower interest rates vs credit cards
- Easy application process
- Less risk since an unsecured personal loan isn't tied to an asset
- Funds usually come through quickly
- Potential credit score increase
- Sometimes lenders charge origination fees. Double check the numbers & do a bit of "comparison shopping" to make sure you get the best offer available.
- Teaser rates require a high credit score (somewhere between 780-850). Note that it's pretty easy to get rates personalized to you.
- There aren't many options available (if at all) for credit scores below 600.
Debt consolidation vs debt settlement
Debt consolidation: Debt consolidation is where a personal loan is used to convert revolving debt (like credit cards) to installment debt, potentially with a lower interest rate.
Debt settlement: Also known as "debt reduction", debt settlement is where a company negotiates a lump-sum payment with your creditors for less than what you owe. If debt reduction is what you're after, be certain that you choose one of the top reputable debt settlement companies to avoid scams and ripoffs.
Benefits of paying down debt
Handled responsibly, a personal loan has several financial benefits that include:
- Lower credit utilization rate
- Improved credit score
- Better chances of qualifying for lower interest rates in the future
Lastly, here are a few things to keep in mind about using a personal loan to manage your debt:
- There's no guarantee that your interest rate will be lower. That's why it's important to shop around to see the available options.
- Debt consolidation restructures debt, it doesn't eliminate it.
- To pay down debt effectively, it's important to practice good spending behavior and form better habits around credit and money management