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Personal Loan For Debt Consolidation: A Guide

6-Minute Read
Published on August 23, 2022
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Life is complicated enough without owing money to several lenders that each have their own payment schedule. The separate payments and collection of due dates scattered throughout the month can be challenging to keep up with.

If you’re tired of all the payments, a personal loan to consolidate debt offers a solution. Let’s take a look at everything you need to know about using a personal loan to consolidate debt.

It's Time To Free Yourself From Credit Card Debt.

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How Can I Use A Personal Loan To Consolidate Credit Card Debt And Other High-Interest Debt?

If you owe money to multiple lenders, debt consolidation is a worthwhile option to consider. It’s an especially good option if you have high-interest credit card debt that’s eating away at your financial security.

Using a personal loan for debt consolidation offers help on two fronts.

First, you can eliminate the need to pay multiple lenders each month. Instead, you’ll use the personal loan funds to pay off multiple accounts. At that point, you’ll only have one installment loan payment to keep up with each month.

Second, you can seek out a lower interest rate for your debt consolidation loan. Depending on your existing loans, a lower interest rate could save you thousands over the life of your loan.

What Is Debt Consolidation?

Debt consolidation is the process of combining many outstanding debts into a single loan.

When you pursue debt consolidation, you’ll whittle down several monthly payments into a single payment. One monthly payment means fewer bills to keep up with. Debt consolidation is especially helpful for those with several revolving accounts, such as high interest credit cards. You’ll be able to lock in a set loan term for paying off your debt.

Since lenders offer a wide range of loan terms, you’ll have the chance to opt for a monthly payment that fits your budget. And the ability to shop around for a better interest rate means you can take charge of your financial future.

If you’ve been struggling to stay on top of your debt, it is one way to make your debt repayment journey easier.

What Is A Personal Loan?

A personal loan is an installment loan with a fixed monthly payment. Unlike a revolving line of credit, you’ll know exactly what the lender expects you to pay each and every month.

As you work to get out of debt, the regularity of an installment loan can make it easier to build a budget that works for you. Instead of adjusting your payments on a monthly basis, you can breathe easier knowing exactly what you owe each month.

Personal loans are a type of unsecured debt, which means you won’t have to put up an asset as collateral for your loan. With that, you won’t have to worry about a creditor repossessing a particular asset if you cannot keep up with the payments.

How Does Using Personal Loans To Consolidate Debts Work?

The process of using a personal loan to consolidate debt starts with filling out an application. Be prepared to provide information about your identity, credit history and income to complete an application.

If approved for the personal loan, there are two ways the lender may disburse the funds.

In some cases, the lender will pay off your other debts directly. This involves providing the new lender with information about your loans to complete the payoff. But in other cases, the lender will deposit the money directly into your account, which you can then use to pay off your other loans.

The timeline for this process varies. It could take up to a week to finalize everything with some lenders. But other lenders, like Rocket LoansSM, can offer same-day funding to some applicants.

As you shop around for a personal loan for debt consolidation, a lower interest rate is a top priority. If a personal loan has a lower interest rate than your existing debts, that can lead to savings while paying off your debt.

It's Time To Free Yourself From Credit Card Debt.

Apply for a personal loan in just a few simple steps.

Get Started Today

Using Personal Loans To Consolidate Debt: The Benefits

Every financial decision comes with advantages and disadvantages. A personal loan used to consolidate debt isn’t an exception.

Here’s a closer look at the benefits that come along with using a personal loan to consolidate debt.

Loan Term Flexibility

When shopping for a personal loan, you can usually choose the repayment term. With the ability to choose, you can find a monthly payment option that fits your budget.

If you are able to lock in a shorter repayment term, you’ll keep the overall loan cost lower. That’s because a shorter repayment term means fewer monthly payments.

Lower Interest Rates

The exact interest rate you can lock in for a personal loan varies based on the borrower’s credit score and debt-to-income ratio (DTI). But in general, you’ll be able to find a lower interest rate for personal loans than those attached to your credit card.

A lower fixed interest rate can help you save thousands while repaying your debt. But not all borrowers will find lower interest rates. Typically, a debt consideration loan only makes sense if you can find a lower interest rate.

Single Monthly Payment

Combining your outstanding debt payments into a single monthly payment can help you get a firm grasp of your financial situation. Without the stress that comes with juggling multiple payments, you can build a straightforward budget that works for your finances.

Plus, most lenders will allow you to set up an automatic payment option. With that, you can start to eliminate stress from your life while paying off debt.

Lower Monthly Payment

When seeking out a personal loan, you have the options. It’s possible to lock in a lower monthly payment by finding a personal loan with a lower interest rate or longer loan term.

If you are struggling to keep up with the combined total of your monthly payments, then the opportunity to stretch out your payment obligations can give you some of the breathing room you need in your budget.

Although a longer loan term means you’ll pay more in interest over the life of your loan, this strategy gives you the opportunity to prioritize the cash flow you need to make ends meet.

No Collateral Required

A personal loan is a type of unsecured debt. As a borrower, you won’t have to put up an asset as collateral for the loan. Although this means that no specific asset is tied to the loan, it usually means you’ll find higher interest rates than you would with secured debt.

For example, home equity loans typically have lower interest rates than personal loans because that debt is secured by your home. If you default on a home equity loan, the lender can seize your home. But that’s not the outcome when you default on a personal loan.

Using Personal Loans To Consolidate Debt: The Drawbacks

Of course, there are also some disadvantages to using a personal loan to consolidate debt. Here’s a look at the reasons why this might not be a good idea.

Can Accumulate More Debt Overall

Before jumping into a debt consolidation loan, it’s time to take an honest look at how you got into this situation. It’s critical to assess your spending habits to ensure you don’t end up racking up more debt on your credit cards.

In some cases, you might decide to close your credit cards after paying them off to avoid the temptation to overspend.

Personal Loans Come At A Cost

Personal loans, like all loans, come with interest payments and fees attached. Although a personal loan might offer some savings over a high-interest credit card, that doesn’t mean these loans are free.

Before moving forward with a personal, make sure the costs are worthwhile for your situation.

Origination Fee

An origination fee is a percentage of the original loan amount. Depending on the lender, you might see this cost rolled into your loan or expected as an upfront payment.

The exact size of an origination fee varies based on the lender. But in general, you can expect to pay between 1% and 8% of the loan amount.

Interest Costs

In general, personal loans offer better interest rates than credit cards. But you’ll still face interest payments with a personal loan.

Unfortunately, the interest costs can add up quickly. Here’s a look at how different interest rates can impact your monthly cost for a $10,000 personal loan.

Interest Rate

Credit Score

36-month loan

60-month loan

72-month loan

6%

750+

$304.22

$193.33

$165.73

8%

700 – 749

$313.36

$202.76

$175.33

10%

640 – 699

$322.67

$212.47

$185.26

It’s important to note that a longer loan term means you’ll pay more interest. You’ll need to strike a balance between what you can afford to pay on a monthly basis and the overall cost of the loan.

Other Fees

Depending on the lender, you might encounter upfront fees. Typically, the upfront fees are used to compensate for a lower advertised interest rate.

Instead of relying on advertised interest rates, check out the loan’s annual percentage rate (APR) to accurately compare the cost of one loan to another.

The Bottom Line: Should I Get A Personal Loan For Debt Consolidation?

If you are ready to get your finances on the right track, a debt consolidation loan is a useful tool. You can use a debt consolidation loan to lock in a single monthly payment, which allows for a more manageable budget. Plus, you’ll eliminate the financial threat that comes with the ever-accumulating nature of credit card debt.

Ready to get your financial house in order with the help of a personal loan? Apply online today and start breathing a sigh of financial relief.

Getting A Personal Loan Has Never Been Easier.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer that enjoys helping readers learn more about their finances. She has an MS in Business Management from the University of Florida. You can connect with her on LinkedIn or Instagram @adventurousadulting.