Taking out a debt consolidation loan is a great first step toward a financially healthy life if you have multiple unmanageable debts. A debt consolidation loan will either decrease your interest rate or give you a fixed interest rate in order to gain better control over the amount of debt you have to pay off and to make it easier to clear. There are several ways you can consolidate your debts, such as via a debt consolidation credit card or a personal loan. For those who are interested in using a personal loan for debt consolidation, we have provided a short guide to assist you in finding a good deal.
Situations in Which a Personal Loan is a Good Idea
While personal loans for debt consolidation can save you money and ease your stress, you should still ask if these benefits apply to your situation. A personal loan will not save everyone money. It saves some people money. Whether or not it saves you money depends on the terms of the loan, the terms surrounding your current debts, and your financial habits.
If you have a tendency to miss your monthly debt payments and lose track of them, then a personal loan is usually a better choice for consolidating your debt than a 0% introductory rate credit card. Using a credit card to consolidate debt requires more discipline than taking out a personal loan. Personal loans virtually force a person to repay the debt over a certain time period, but it still requires effort on your part to make the monthly payments on time and resist temptation to use credit cards or to rack up more debt while you’re working on becoming debt-free.
Personal Loans Can Help Your Credit Score
Sometimes, consolidating your debt via a personal loan can improve your credit score. This is a nice bonus of personal loan debt consolidation. Borrowers who use most or all of their credit on their credit cards are penalized by credit bureaus. By consolidating your debt with a personal loan, you clear up your cards to stop hurting your credit score. It transfers your credit card debt to the installment loan column, which is better for your credit score.
Situations in Which a Personal Loan is a Bad Idea
Taking out a personal loan for debt consolidation isn’t a good plan if the interest rate on the loan is higher or the time it would take to repay the debt is longer. If you have bad credit, you should search for debt consolidation lenders that accept bad credit, offer secured loans, and allow co-signers.
What Fees Does the Lender Charge?
When comparing personal loans for debt consolidation, you must factor in the origination fees, which is how much the lender charges for you to take out a loan through them. The origination fee usually ranges from 1%-6% for personal loans. If the origination fee increases the overall amount you’ll pay to clear the debt than if you didn’t consolidate, it might not be worth it. There are a few lenders who don’t charge an origination fee, such as Discover, SoFi, and LightStream.
Does the Lender Offer Additional Support?
Clearing your debt shouldn’t be the only goal you have. Unless you make some changes to your financial habits, you are at risk of getting yourself into debt again. To prevent it from occurring again, it’s essential to learn about good money habits and how to correctly manage your finances. Some lenders offer additional support to help borrowers develop good financial habits, so that they can stay debt-free and in good financial health after the loan ends.
Consider Asking Someone to Co-Sign If You Have Bad Credit
If someone with good credit is willing to co-sign, you can receive a lower interest rate on the personal loan. Asking someone to co-sign is another way of obtaining a consolidation loan if you are struggling to qualify for a personal loan. It’s hard to find someone to co-sign because they are risking their credit score for you, but it can’t hurt to ask someone who is close to you.
Acquiring a personal loan for debt consolidation works out well when you do your research first, create a plan, and develop good financial habits. Now that you know the advantages and disadvantages of taking out a debt consolidation personal loan as well as which situations are best for this type of loan, you are able to make the right choice.