Using Personal Loans for Debt Consolidation: Pros and Cons
Are you juggling multiple loan payments each month? Finding it hard to stay on top of every payment, or sometimes missing one as you try to balance your debts?
Consider consolidating your debt under a single personal loan for simplicity, consistency, and convenience. Consolidating your debt isn’t just a way to simplify your debt load, though – it also has the potential to reduce the final amount you pay by lowering the interest rate on your loans.
Using personal loans for debt consolidation can be a smart option when reviewing your financial situation. With the flexibility of a personal loan, you can combine multiple types of debt into one loan with a single monthly payment. Be sure to weigh the pros and cons to determine if it’s the right choice for your needs.
Pros of Using Personal Loans for Debt Consolidation
Using a personal loan is a financial option for qualified borrowers with multiple loans or credit cards. Consolidation is simply using one loan to pay off several others. While this financial tool may incur some upfront charges or fees, consolidating your debt often still results in overall savings and a more manageable repayment plan.
Possibly Reduce Interest Rate
Personal loans often have lower interest rates than payday loans and credit card cash advances. However, depending on your creditworthiness and existing loan terms, your personal loan rate might not always be lower. Be sure to compare rates before consolidating debt.
Locking in a Low Rate
When you borrow money, you might have an interest rate that is “variable.” This means that the interest rate may change at times, typically because it is linked to a financial index, such as the prime rate. So, if that index rate rises, so will your interest rate. Personal loans, however, are often fixed-rate, keeping your payments simpler as you won’t have to factor in economic changes.
Simpler Repayment Timeline
When you take out a personal loan, you agree to a fixed repayment schedule. Having a single straightforward payment plan is convenient, especially compared to managing multiple loans with different interest rates and potentially longer repayment terms.
Possibly Boost Your Credit
If managed properly, using a personal loan to consolidate debt can improve your credit score over time. However, closing paid-off credit accounts or taking on a long-term personal loan with a high balance may initially cause a dip in your score.
Cons of Using Personal Loans for Debt Consolidation
Don’t assume that personal loans are a catch-all solution due to their debt consolidation benefits. You should carefully consider your options to see if a personal loan for debt consolidation is right for you.
Interest Rates Might be Higher
While personal loans have lower interest rates than many types of loans, the rate on a new personal loan may not always be lower than your current rate. If you consolidate any debt with a lower interest rate, such as student loans, you might end up paying more in the long run due to a higher interest rate. We provide a simple debt consolidation calculator that will help you understand how your debt load will change after consolidation.
You Might Pay More Interest
Even if your new loan has a lower interest rate, you could end up paying more in total interest overall. This can happen if the repayment term is extended, resulting in more interest accumulating over time. For example, stretching your payments over a longer period can increase the overall cost, even if the rate is lower. Always compare the full loan terms, including both the interest rate and the loan length, before making a decision.
You May Get Hit With Fees
Depending on your original loan terms, there may be prepayment fees if you pay off your loan early. These fees help balance the lender’s expected returns from interest over time. Additionally, some loans might include origination fees, which are usually a small percentage of the loan amount, and contribute to the overall cost. To make the best decision, be sure to review all potential fees before consolidating your debt.
You May Need Collateral
A common type of personal loan is a secured loan, which means it’s tied to collateral, such as a vehicle or another valuable asset. If you’re ever unable to repay as agreed, the lender may use the collateral to help cover the remaining balance.
Alternative Ways to Consolidate Debt
A personal loan can be a valuable financial tool when leveraged for the right type of debt consolidation, but it is not the only way to manage debt.
Credit Card Balance Transfer
Balance transfer is simply moving debt from one credit card to another. You can specifically seek out a credit card for this purpose that may offer a few months of 0% interest. This allows you to get ahead of interest and lower your debt load. This is usually ideal when you have a relatively small amount of debt and are looking to switch to a better credit card.
Home Equity Loans
Home equity loans allow you to borrow against your home’s value, often at a lower interest rate. This money could be used to consolidate debts instead of a personal loan. However, since your home is used as collateral, failure to repay could lead to foreclosure. Be sure to assess this risk before using home equity to consolidate debt.
Consider Lanco FCU for Your Financial Needs
If you are struggling to balance several loans or debts, personal loans for consolidation is often the best answer. Between lower rates of interest and simpler monthly payments, having your debt unified under a single personal loan can provide long-term benefits that will save you time, money, and the stress of debt.
When considering your debt consolidation, be sure to include Lanco FCU in your list of options. As a local credit union, we offer competitive interest rates, convenient payment options, and potentially lower fees, or no fees at all. If you are not yet a member of our credit union, don’t hesitate to join!