Choosing A Personal Loan for Debt Consolidation

September 28, 2020
debt consolidation loan vs personal loan

You may choose to find a personal loan to consolidate your bills on your own. Personal loans may be taken out to consolidate debt and pay off multiple debts with one monthly payment. However, when should a personal loan be used vs a debt consolidation loan? 

This article will help you decide between debt consolidation vs personal loan, which is the best option for you.

What is Debt Consolidation?

Debt consolidation is an option for consumers with too much debt to combine their bills into one monthly payment. Debt consolidation can either be through a loan or a debt management program. Consumers with high-interest loans and credit cards can often see their total debt reduced by lowering interest rates and fees.

A debt consolidation loan will lump all of your debts into one loan with a low monthly payment. This loan will pay off the original debts, and you will then have one loan to pay on. Consumers can apply for a debt consolidation loan through their bank or other financial institution.

 If they do not qualify, then they can use a debt consolidation company that will use the same process and combine all debts with a loan. Most creditors will wait for the process to finish because they know the debt will be paid off.

Types of Debt Consolidation

There are two main types of debt consolidation loans consumers can choose from. One is a secured loan that uses collateral, such as a house or a car. The other is an unsecured loan, which means a general obligation that is not protected and supported only by the borrower’s creditworthiness. An unsecured loan is harder for consumers with a higher debt-to-income ratio to obtain. 

Both loan types will offer a lower overall interest rate than the consumer currently has. The interest rate is a fixed rate in most cases; therefore, the consumer will know what their payments will always be and how much they will have paid in interest by the end.

Other types of debt consolidation which are less common, are listed below:

  1. Crest Card Balance Transfer – Obtaining a new credit card to consolidate all of your existing credit cards. This will only be successful if the card does not have a high-interest rate. Some credit card companies will offer little to no interest for a specific period to allow the consumer to make larger payments and pay off their debts sooner.
  2. Home equity Loan – For consumers who own their home, they may choose to do a home equity line of credit, also called a HELOC. Most homeowners who itemize their deductions at tax time like this option because they can deduct the interest.
  3. For consumers with student loan debt, they can go through the Federal Direct Loan Program(FDLP) and consolidate their student loans only. The interest rate will be lower as it will be the average of all the student loan interest rates you have.

Requirements for Debt Consolidation

Consumers must qualify for the loan. The requirements vary depending on the borrower’s current financial situation and credit score. The lender or debt consolidation company you choose will help you decide the order in which creditors are paid off. Typically, creditors with the highest interest rates are paid off first.

Choosing a debt consolidation loan

Choosing an experienced consultant to handle your debt consolidation loan has many advantages. Consolidation companies can stop creditors from harassing you with phone calls or letters. While a debt consolidation loan may be the better option for you, it could have a higher interest rate than a personal loan because it is a risky loan. Also, for some consumers, it may be hard to let someone else handle their finances; however, this may be the best option when discipline is lacking.

Choosing a personal loan for debt consolidation

When a consumer chooses to take out a new personal loan for debt consolidation, they will be making one monthly payment to the new lender. With anything there are advantages and disadvantages to using a personal loan for debt consolidation. 

Advantages of Choosing a Personal Loan 

  • The monthly payment should be considerably less. The only time your monthly payment should be higher is when the consumer has the extra cash and wants to pay off the overall debt faster.
  • It could reduce the interest rate
  • Your lender will set up a repayment timeline
  • When your personal loan is paid off, it will significantly increase your credit score, which should be every consumer’s main goal for financial stability.

Disadvantages of Choosing a Personal Loan

  • Consumers need to understand there could be additional fees to pay off and obtain new loans. 
  • Creditors may charge you higher interest rates for lower credit scores or higher borrowing amounts and repayment timeframes.
  • Personal loans are risky for most consumers as it adds yet another payment. The consumer is responsible for paying off the debt without mediation.
  • Another risk factor is that some consumers may be offered a higher loan than they need to pay off debts, which could have a higher monthly payment. Personal loans typically come with a higher down payment. This increased cost is unfortunately more expensive than using a debt consolidation company. 

In Summary

In today’s society, it is easy to become financially unstable when debts pile up. From job changes or loss, medical issues, or just merely trying to ‘keep up with the Jones’, there are multiple ways for you to quickly lose track of your financial budget.

Keeping your debt-to-income ratio low is the key advantage of staying on top of your finances and maintaining a personal budget. However, if your expenses have greatly exceeded your net income, there are options to help get you out of debt. Contacting a consultant with a debt consolidation company is one option you should consider. With all your bills in one loan, with one lender, you will have less to manage and remember.

Regardless of the choice of loan you decide on, they both can improve your credit score. The difference will be the time factor and by how many points. However, there are other options to help you reduce your debt. Contact us at Roundleaf Inc. to learn more about the debt settlement programs we have to help you reset your debt.

Similar Readings:

  1. What is Debt Consolidation?
  2. Debt Settlement Vs. Debt Consolidation
  3. How To Consolidate Credit Card Debt – What You Need To Know