Top Reasons To Use A Personal Loan to Consolidate Debt
Top reasons to use a personal loan to consolidate debt
Using a personal loan to pay off your debts can help reduce the number of payments you’re making each month down to one. In many cases, consolidating your debts into a personal loan could even save you money on future interest payments as you pay down the loan balance.
When you consolidate your debt using a personal loan, you’ll receive a lump sum cash loan, which you can use to pay off the debts you want to consolidate in full. Now, all you need to focus on is repaying the personal loan.
That process is simplified with personal loans, as they are installment loans that generally charge a fixed interest rate. Installment loans are paid back to the lender in equal payments, over a set period of time. You’ll make equal, monthly payments until you have completely paid back the loan and any interest and fees charged.
Here are 7 reasons it may benefit you to consolidate debt with a personal loan:
- Save on high-interest debts
- Have one single payment
- Pay off loans at a fixed rate
- Know what you’ll owe each month
- Pay off debt for good
- Rebuild your credit score
- Get your money fast
Save on high-interest debts
When consolidating high-interest debt – such as credit cards – into a personal loan, you can potentially save money on interest payments over time as you repay the debt. The key is to secure a personal loan with a lower rate than your existing debts, which is easiest to do if you have a good credit score.
Double check the debts you intend to consolidate and payoff to ensure they charge a higher annual interest rate, or APR, than the personal loan you intend to use. If you get offered a personal loan that charges 5% APR, you wouldn’t want to use that loan to consolidate a student loan you have that’s been charging you 3% APR, unless there is another tangible benefit to the loan, such as additional cash out.
Have one single payment
This one won’t directly save you money, but if you’re having trouble keeping up with due dates and payments on multiple debts, consolidating all of your debts into one loan with one monthly payment can help you get organized and avoid late payments. Sometimes, simplicity can make a large difference in your ability to quickly and efficiently payoff debt.
Pay off loans at a fixed rate
Most personal loans charge a fixed interest rate, unlike credit cards and some personal lines of credit, which can help you avoid sudden increases in your interest rate. Changes in interest rates when you have an outstanding balance can be a major headache, not to mention an unexpected increased cost to your monthly payment. When you use a personal loan to consolidate your variable-rate debts, you get rid of that headache.
Know what you’ll owe each month
Personal loans are a type of loan known as an “installment loan”. This means that the loan is paid back in equal payments over a fixed period of time, with the interest and fees already included in your monthly payment. Unlike credit cards, this means that your payment will be the same each month, taking the guess work out of your budget process, and making it easy to plan and save for.
Pay off debt for good
When used correctly, personal loans can be a great tool to help rid yourself of debit for good. Unlike credit cards and personal credit lines, which are revolving accounts, personal loans are fixed in both term and amount, meaning that once it’s paid off, you are done with the loan. This makes it easier to avoid adding additional debt during the life of the loan, and help you stay out of debt.
When consolidating debt into a personal loan for the purpose of getting out of debt, it is important to ensure that you do not continue using any of the credit cards or credit lines that you paid off with the personal loan. When you’ve paid off your loan — if you haven’t racked up other unsecured debts in the time — you’ll be done with those debts for good.
Rebuild your credit score
If you use a personal loan to pay off credit card balances, it can help to reduce your credit utilization rate. Your utilization rate is how much of your overall credit limit you are using, and is the second most important factor in determining your credit score.
Many top credit experts recommend keeping your credit utilization below 30% to maintain a good credit score. For example, if your overall credit limit on all of your accounts is $30,000, your goal would be to use less than $9,000 of it.
Another advantage of consolidating your debts into a personal loan is the ease of budgeting for the fixed monthly payment. Establishing a pattern of on-time payments can help your credit score, as your payment history makes up roughly 35% of your overall score. If you set up automatic payments, they can be made on time each month and make this easier.
Finally, having the personal loan helps to add diversity to your credit mix, which accounts for nearly 10% of your overall credit score.
Get your money fast
Most lenders will allow you toapply for a personal loan online. Generally, you should know if you’re approved and offered loan terms within minutes. If you accept, you’ll likely see the funds in your bank account in a few days — and some lenders even offer financing in as little as one day. The speed can come in handy if you’re eager to get moving on your debts and started on your journey to becoming debt free.