When Personal Loans for Debt Consolidation Make Sense
Personal loans for debt consolidation simplify paying bills because they can organize debts into one monthly payment. The payment may be less than the combined monthly payments that most people regularly pay. Consumers sometimes get lower interest rates and pay off their debts faster with the right consolidation loan.
Depending on each borrower’s credit score, they may find a personal loan for debt consolidation that is cheaper than their old debt. The type of debt that can be consolidated includes credit card debts, shorter-duration loans, medical bill personal loans, and other expenses. Banks and credit unions offer low-interest personal loans as low as 6 percent APR, but only those with excellent credit qualify.
Direct lenders, secured loans, and credit card transfers are other debt consolidation options. People often fail to shop around for the best offers and loan terms, but doing so makes a big difference. Consumer debt reached $4 trillion in the United States in 2018. Credit card debt accounted for 27 percent of the total, and most credit cards carry fairly high rates of interest. That means consumers can sometimes money by consolidating their debts. They can also sometimes spread out their payments or pay off their debts faster.
Are Personal Loans Good for Debt Consolidation?
Getting a personal loan for debt consolidation has never been easier because there are thousands of lenders available online with various interest rates and repayment terms. There are essentially two types of consolidation loans that help borrowers manage debt. The first type consists of secured loans. These work well for larger amounts of debt for people who have some kind of security, such as home or business equity, retirement accounts, or stock investments. Banks and credit unions offer consolidation loans for people with excellent credit. However, borrowers should beware of teaser rates that expire after an introductory period.
There are also consolidation loans for student loans. For example, hard-pressed recent graduates, who are often in entry-level jobs, may cut their payments by combining federal and private loans into one loan. A Direct Consolidation Loan Application allows borrowers to consolidate their loans at a fixed interest rate. Those with private loans could also use a personal loan to pay off student loans, but these usually carry higher interest rates than the original loans.
Many lenders prefer the simple method of using an unsecured personal loan to consolidate small-to-medium-sized debts. Another option includes taking advantage of introductory credit card offers, such as those with a full year of zero-interest or low-interest rates. These are ideal for consolidating credit card debt, but the promotions last for a limited time. If borrowers can pay off a significant part of their debt within that period, credit card transfers are a valid way to consolidate debt with these cautions:
- Borrowers should note the interest rate after the introductory period to determine if it’s less than they are paying.
- Debt consolidation requires keeping a handle on spending. It’s important not to reload credit cards after transferring a balance.
- Sometimes, it’s possible to renegotiate with creditors to reduce interest rates or monthly payments.
- Remember that it’s necessary to meet the payments of the consolidation loan to retain favorable terms and interest rates.
Pros and Cons of Personal Loans for Debt Consolidation
There are many benefits of getting either a targeted debt consolidation loan or a personal loan used for debt consolidation. The greatest benefit rests on the elimination of multiple bills. The debts become easier to manage and work into the family budget. Once all the debts are consolidated into one monthly payment, borrowers don’t have to worry about missing monthly bills due to forgetting about them.
The pros of debt consolidation include:
- Lower interest rates than high-interest credit cards
- Ability to pay off the debt faster
- Better credit scores when the borrower manages his or her debts responsibly
- Fewer risks of late payments with just one monthly bill to manage
The cons of consolidating debts include the following practices:
- Open credit on cards with zero balances generate temptation to buy products using credit cards.
- Further damage to credit scores occurs when taking on new debt shortly after consolidating existing debts.
- Zero-interest introductory offers on credit cards tempt borrowers into new debt.
- Debt consolidation may not solve the underlying financial difficulties.
Low-Interest Personal Loan for Debt Consolidation
A low-interest personal loan makes a great option for consolidating debts that would take between one to four years to repay. It’s usually not beneficial to consolidate debts that will take less than 6 months to repay as the effort and fees will leave few savings.
Personal Loans for Debt Consolidation with Fair Credit
If a borrower doesn’t have great credit, personal loans for debt consolidation may still be possible. Shopping around for the best deal is important. Most lenders require a minimum credit score of 630 to 640 to qualify for a relatively low-interest personal loan. Those with credit scores under 580 will usually find it difficult to find a debt consolidation loan without providing collateral or paying a high-interest rate.
Alternatives to debt consolidation include refinancing, getting a loan from an employer, or applying for a loan from a neighborhood lender.
Personal Loans for Debt Consolidation with Bad Credit
There are personal loan options for those with bad credit. The interest rates tend to be high. Sometimes the rates are so high that they outweigh the benefits of consolidation.
Borrowers with bad credit do sometimes find a situation that works for them. The borrower might want to simplify payments by having only one bill each month. The borrower might want to extend the repayment period to receive lower monthly payments. Some people might be paying such high-interest rates that even a high-rate consolidation loan is better than what they’re paying.
Those with bad credit can also apply for joint personal loans. This may improve the likelihood of receiving a loan, especially in one of the applicants has a good credit score. Regardless of the score, joint loans might qualify for better interest rates because there is less risk of the joint borrowers defaulting since both are held equally responsible for the full amount of the loan.
Getting a cosigner is another option for being approved for a personal loan with a lower interest rate, especially if the cosigner has good or excellent credit. With a cosigner, the borrower repays the loan, and the cosigner is never bothered unless the borrower doesn’t make the payments.
In worst-case scenarios, consumers might consider filing for bankruptcy if their total debt payments are simply not sustainable. The steps for filing for bankruptcy include:
- Take an education course and receive credit counseling from a provider approved by the U.S. Trustee Program.
- File for Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, or Chapter 15 bankruptcy protection.
- Create a budget.
- Sell off valuables to liquidate as much debt as possible.
Other alternatives to debt consolidation include emergency personal loans to cover unexpected expenses until a borrower can get back on track.
How to Apply for a Personal Loan to Consolidate Debt
Applying for a personal loan for debt consolidation can be an easy process, but borrowers need to make a plan for it to be successful. That means carefully studying loan offers, choosing a loan with affordable payments, reducing expenses, and creating a budget. Personal loan apps and budget apps can help anyone create an effective budget, and there are many financial apps online to help anyone get started.
Long-term personal loans or secured consolidation loans may reduce a debtor’s overall payment amount and interest rates while helping them get out of debt faster.
Making monthly payments to multiple creditors can be an expensive hassle, especially if some of those debts have high rates of interest. Taking out a personal loan is a solid option after doing the necessary planning. Armed with a budget, affordable payments, and a lower combined monthly payment, consumers may reduce their debts and take control of their finances.