Personal loan for debt consolidation: Pros and Cons

If you are planning on clearing your debt, consolidating them with a personal loan account is an excellent option. Making multiple monthly payments can be exhausting, and it can also be costly. But taking out a personal loan debt to consolidate your debts can make it easier for you to clear those debts.

A consolidated debt can have a lower interest rate compared to the rate of all your previous debts combined.

Personal loan for debt consolidation

Ways to Consolidate your Debt

There are several ways to consolidate your debt. They include the following:

Personal loans

You can access personal loan account from banks, credit unions, and online lenders. The interest rate on these loans depends on your credit score, credit history, your income, and other financial indicators. You can use the money for anything, and that includes repaying your existing debts.

With most personal loans, you do not need to provide a guarantee. They are usually unsecured loans. You will know the monthly payments term before you even finalize the loan. The monthly payment terms generally last from three to five years.

Balance transfer credit cards

Balance transfer cards are 0% APR cards that allow you to enjoy zero percent interest for a period. That means that you won’t pay interest rates for some billing cycles. Some best debt consolidation companies charge a small fee to transfer the balance from your previous cards to the new 0% card.

The bank has certain policies that determine the amount of money that you can transfer to the card. You, however, need to finish paying the balance before the promotional period ends. If not, the interest rate may be higher when the promotional period ends.

Home equity loans

If you have a home, and you have a line of credit for it, you can opt for a home equity line of credit. When you opt for a home equity line of credit, you will realize that the rates are lower.

This is often the case because you will use your home as a guarantee for the loan. This secure loan is cheap, but it is also risky. If you are unable to pay off the loan, you may lose your home.

What to Consider When Applying For Consolidated Funds
What to Consider When Applying For Consolidated Funds

Pros of Debt Consolidation with a Personal Loan

The best way to consolidate your debts come with a lot of benefits. These benefits include the following.

  1.       You can reduce your interest rates

The idea behind getting a personal loan account to consolidate your debt is to get a low-interest rate loan to pay off all your previous debts. Ideally, the new rate should be lower than the average rate for all your loans together. Hence, one advantage of this is that you can save on interest charges.

  1.       Enjoy low fixed rates

If you usually struggle to pay off your loans due to variable costs, consolidation online will be beneficial to you in the sense that the rate on your new loan will be fixed by the bank.

You will know the exact amount you will pay at the end of the month. Your rate won’t increase due to market charges, and you can plan your finances very well.

  1.       You can improve your credit score

When you get out of debt quickly, your credit score will improve. When you were unable to pay your debts on time, it negatively affected your credit score. Missed settlement impact your score, and it makes you look financially irresponsible.

But when you consolidate your debts, it makes it easier for you to make regular loan payments. These regular payments will not only help you to clear your debts, but they will also help you to improve your credit score.

  1.       It helps you to know exactly when you will be out of debt

You will need to negotiate the loan term for the new loan. That means that you will know how long it will take for you to clear your debts.

Cons of getting a personal loan to consolidate your debt

Using a personal loan to consolidate your debts has its disadvantages too.

  1.       Although the idea behind consolidating your debts is to get loans at lower rates, it does not always happen. There is also no guarantee that the interest rate on the new loan will be lower. In some cases, the rate may be lower, but the fees may take up all that you will save on interest rates.
  1.       The fees may also be costly. This can make the entire process more expensive compared to sticking to your old debts.
  1.       You may put your assets at risk. There are instances where you will need to bring a guarantee for the loan. The asset can be your house. If you obtain a secured personal loan and you are unable to repay the loan on time, you risk losing that asset.
  1.       You may end up in deeper debt if you do not manage your finance properly. Some people are tempted to use their credit cards after consolidating their debt. This leaves them in more debt since they will need to repay the loan and the new debts.

Consolidating your bills is an excellent idea if you get favorable terms and low-interest rates. If you qualify to consolidate your debt, ensure that you have a reliable repayment plan. You should also learn to manage your finances well so that you do not sink into debt again.