Can A Personal Loan Be Used To Consolidate Debt?
Debt consolidation transforms multiple debts into a single monthly payment. This is an excellent option for those who have many debts and want to reorganize their payment schedules, interest rates, and fees into one. Through debt consolidation, you can take control of your debts and manage them correctly.
In the US, for example, debt is one of the common financial issues in California. Having so many debts can be challenging to handle. Debt consolidation might be one of the answers to easily eliminate a number of debts a person has. Furthermore, there are several ways to consolidate debt, and one of these is by getting a personal loan.
Debt Consolidation with a Personal Loan
Having to pay different debts to a variety of lenders every month can be tough to handle. It can be expensive as well, especially when some of your debts charge you with higher interests. Using a personal loan to consolidate your debts can help you with that problem.
Debt consolidation with a personal loan usually offers lower interest rates than the current number of individual debts you owe. Hence, it can help your debt repayment situation become more manageable, and it can also save you money. You can compare lenders and check out their loan offers to widen your options.
When you get approved for a personal loan, you will know the payment schedule, interest rates, and fees upfront. Some lenders offer a repayment period of 3 to 5 years to help consolidate your debts. Moreover, most personal loans are unsecured, which means you don’t have to pledge collateral for the loan.
Most of the time, people use personal loans to consolidate credit card debts. However, it can also be used to consolidate business debts. Furthermore, lenders might require you to have income outside your business and use your personal credit status to get approved.
For those who currently have multiple business loans with high-interest rates, a secured consolidated loan is recommended. This type of loan requires you to pledge collateral using your business assets. Suppose you are engaged in manufacturing and owns equipment that has a resale value. There is a good chance that the lender will accept the equipment as collateral and offer you a low-interest loan to consolidate your business debts.
Advantages of Debt Consolidation with a Personal Loan
To figure out if a personal loan is a right option to help consolidate your debts, here are its benefits:
It can help reduce the interest rates from your current multiple debts. Lenders can offer lower interest rates on personal loans than any other type of debt. If you can qualify and reduce your current rate, you can save money in the long run concerning loan repayment.
It can help you to have a lower fixed rate. Some debts have a variable interest rate. This means it is linked to a certain financial index. If the index rises, your interest rates go up as well. You can choose to get a fixed interest rate to be fully aware of your monthly loan repayment.
It can help you if you have a fixed monthly repayment schedule. The loan agreement you entered into with the lender will show your monthly repayment schedule. Because you have a schedule, you will know exactly when to pay and when to become debt-free.
It can help boost your credit. Many factors can affect your credit score. If you pay your loan repayments on time, your credit score will have a positive impact. On the other hand, if you fail to make proper payments, your credit score will go down.
Disadvantages of Debt Consolidation with a Personal Loan
Aside from the benefits, it would help if you also considered the disadvantages a personal loan has in consolidating debts:
It may end up with a higher interest rate. If you stretch your repayment schedule into a longer period, you might have a higher interest rate. If you choose a five-year loan term in a two-year payable debt, you have to pay three more years in interest. Hence, it would be best to choose a convenient loan term for you not to end up with high interests.
It may have fees. Some lenders charge fees in taking out a personal loan. This includes origination fees, application fees, and prepayment penalties if you repay your loan earlier than expected. You should be aware of these fees before you enter into a loan agreement.
It could lead to deeper debt. Some use a personal loan to consolidate credit card debts. If you pay your credit card debts using a personal loan, you clear up your line of credit. However, if you use the credit card again and fail to pay back the balance, you might end up owing to the original lender again.
This means you have to pay your personal loan plus the new credit card debt, which leaves you in a bad financial situation.
Getting a personal loan to help consolidate your debts is an excellent option only if your new loan has favorable loan terms and a lower interest rate compared to your current debt. That way, you can save money as well, aside from having the ability to take control of your multiple debts situation. Moreover, if the new loan has higher interest rates than your current debt, it is best not to push through with it.