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If paying off debt is your goal, debt consolidation with a personal loan can sometimes make debt repayment easier and cheaper.
You can consolidate all different kinds of debt using a personal loan. But first, you’ll want to figure out if it’s your best option.
You could reduce your interest rate
Personal loans can have lower rates than other kinds of debt. If you can qualify for a low-interest personal loan and reduce your rate, you’ll save yourself money on loan repayment.
You could lock in a low rate
If you’re tired of owing money at variable rates, you could get a fixed-rate consolidation loan so you’ll know exactly what your monthly payment will be each month.
However, although many personal loans have low teaser rates, those rates can go up. Make sure you find out the maximum rate you could be charged for your consolidation loan.
You will have a repayment timeline
When you take out a personal loan, you agree to repay that loan on a set schedule. Since you’ll have your loan term going in, you’ll know exactly when you’ll become debt-free if you pay on time.
Be aware that if you want to pay off your loan early, your lender may charge a prepayment penalty.
You could boost your credit
Your credit scores are based on a number of different factors. Consolidating your debt with a personal loan could help your credit if it leads to a lower credit utilization rate and more on-time payments.
You may pay a higher rate
There’s no guarantee a personal loan will have a lower interest rate than all the debt you pay off. If you consolidate any debt with a lower interest rate, you’ll raise the costs of repaying it.
You could end up paying more interest
Even if you lower your interest rate, there’s a chance your personal loan could cost you more if you stretch out your repayment period for too long.
This could mean you’ll pay more interest over time, depending on your loan’s interest rate.
You could get hit with fees
Depending upon your lender, you could end up owing application fees, origination fees or prepayment penalties if you pay off your loan early.
These fees sometimes make consolidating debt more costly than just continuing to pay back your current lenders.
You might put assets at risk
Some personal loans are secured personal loans. With a secured loan, certain assets will act as collateral to guarantee the loan.
Lenders could take the assets if you don’t repay as promised. If you take out a secured personal loan to consolidate debt and you don’t pay back your loan, you could lose the property you put on the line.
You could end up deeper in debt
When you pay off credit cards using the proceeds of a personal loan, you free up your line of credit. If you use these cards again and can’t pay off the balance, you could end up owing your original creditors again.
But now you’d have to pay off your consolidation loan and a bunch of new debt.
Consolidating debt with a personal loan can be a good idea if you can get a new loan with favorable terms and a lower interest rate than current debt.
If you qualify, make sure you understand the loan terms, have a plan to pay it back and get your spending under control so you don’t end up deeper in debt. If the conditions are right, a debt consolidation loan can be a good tool to help you become debt free faster.