Debt Consolidation with a Personal Loan: How it Works and When It’s a Good Idea
When you get into debt, it can feel like you’ve lost control. Suddenly, you have all these extra bills, and it looks like it’s going to take you years to pay off your credit cards as their interest continues to accrue at an alarming rate.
You may fall further behind on making your repayments, which will push down your credit score which in turn will prevent you from borrowing money in the future.
Using a personal loan for debt consolidation will lift the weight from your shoulders and help you to get your financial situation back under control.
What is Debt Consolidation?
Debt consolidation is essentially where you take out a new loan to pay off all (or most of) your other debts. This allows you to stop all those different interest rates, all those different bills, and simplify it into one monthly payment.
The biggest advantage, however, besides the fixed interest rate and the single payment, is that you can pay off high-interest loans or all your credit card debt, so you know exactly how long it will take you to be debt-free.
If you’re stuck with a lot of credit card debt, this can be life-changing.
How Does Debt Consolidation with a Personal Loan Work?
When a personal loan is used to pay off your debts, such as credit card payments, loan repayments, and other debts, you are then able to just make one, much more manageable monthly payment, to pay off the personal loan used for the debt consolidation.
So, why would a new lender want to pay off your debts? Because by helping you get your debts under control, you also “transfer” that debt to them, meaning you pay off your other lenders and pay them for the money they’ve lent you instead, via your interest rate.
The interest of a personal loan used for debt consolidation will be based on your credit score and your financial situation, and most lenders will have repayment periods ranging from 3 to 5 years. You will find that most of these personal loans are unsecured, so you will not have to provide any collateral.
Is Debt Consolidation with a Personal Loan a Good Idea?
Yes, in most cases.
While there are a few pitfalls to avoid, consolidating your debt is nearly always a good idea. The only danger is that if you use the personal loan to pay off high-interest credit cards, and you then need to use those credit cards again, you will end up in even more debt than you were in before attempting debt consolidation.
This is something you should think about. If you think you may be tempted to use your cards again, consider closing those accounts after you consolidate.
Yes, that will harm your credit score for a short time, but it’s nothing compared to what it will do if you can’t afford the debt you build up and start defaulting on your payments.
A loan is always the better choice here. If you need to keep an emergency credit card, fine, but you only need one.
There are several benefits to debt consolidation with a personal loan:
- better budgeting – it is much easier to manage and budget for one monthly payment than managing many different payments of varying amounts and payment dates
- your remaining debt is clearer – you will find it much more straightforward to know exactly how much you owe, how long it is likely to take to pay it off, and the interest being charged
- you can boost your credit – debt consolidation can lead to a lower credit utilization rate, and you will have on-time payments, both of which can increase your credit score
- you can build up an emergency fund with your savings, so you don’t use your credit cards again
- it’s more motivating – you can even work on paying it off early (often without penalty), should you choose to.
Are Debt Consolidation Loans Easy to Get?
You will need a reasonable credit score to get a debt consolidation loan. In most cases, a personal loan will be assigned to you by a lender, and they will simply be more assured that the loan is being used for debt consolidation.
It might still be possible to get a debt consolidation loan with a lower credit score, but this will most likely be a secured loan with much higher interest rates.
This means that, not only will it be more expensive, but the lender requires an asset for collateral that they are allowed to seize should you not be able to make the repayments for any reason.
If you are worried about losing a personal asset, maybe even your home, you should definitely think twice about taking on a secured loan.
What Do I Need to Get a Debt Consolidation Loan?
To qualify for a debt consolidation loan, you need to have a reasonable credit score (though a “bad” score may not rule you out). If you want the lowest interest rates, you need to have a good credit score (typically 550, 600, or higher), and you need to be in control of your debt, even if it is large.
You also need to be able to afford your new repayment amount (though obviously, your lender will understand that you will no longer have your other debt repayments).
Our lenders’ requirements are:
- in your current employment for at least 90 days
- US citizen or a permanent resident over the age of 18
- it’s recommended to have an income of at least $1,000 per month after tax
- a checking account in your name
How Do I Apply for a Debt Consolidation Loan?
Applying for a debt consolidation personal loan is simple – but the best way to ensure you have the highest chance of approval and get the lowest interest rate available to you, is to use our comparison service.
Simply fill out our online application, stating that you want a debt consolidation loan, and telling us how much you would like to borrow. We will compare hundreds of loans and lenders and present you with the best.
We’ll offer you the lender with the lowest rate possible, so your debt consolidation loan will be much easier to pay off. Simply pick the one that suits you, and you’ll be taken to their site where you can agree to their terms – after that, the money can be in your account within hours!