Using Personal Loans to Consolidate Debt: The Benefits
Every financial decision has pros and cons. A personal loan used to consolidate debt is no exception.
Here is an overview of the benefits that come 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 will reduce the overall cost of the loan. Indeed, a shorter repayment term means fewer monthly payments.
Lower interest rate
The exact interest rate you can lock in for a personal loan varies depending on the borrower’s credit score and debt-to-income ratio (DTI). But in general, you will 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 of dollars while paying off your debt. But not all borrowers will find lower interest rates. Generally, a debt matching loan only makes sense if you can find a lower interest rate.
Single monthly payment
Consolidating your outstanding debt payments into one monthly payment can help you get a clear understanding of your financial situation. Without the stress of juggling multiple payments, you can set a simple budget that works for your finances.
Additionally, most lenders will allow you to set up an automatic payment option. With this, you can begin to eliminate stress from your life while paying off your debts.
Lower monthly payment
When looking for a personal loan, you have a choice. It is possible to lock in a lower monthly payment by finding a personal loan with a lower interest rate or a longer loan term.
If you’re struggling to meet the combined total of your monthly payments, the ability to stretch your payment obligations can give you some of the wiggle room you need in your budget.
Although a longer loan term means you’ll pay more interest over the life of your loan, this strategy gives you the ability 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 will not have to provide any asset as security for the loan. Although this means that no specific asset is tied to the loan, it generally means that you will find higher interest rates than with secured debt.
For example, home equity loans generally have lower interest rates than personal loans because this debt is secured by your home. If you default on a home equity loan, the lender can foreclose on your home. But that’s not the result when you default on a personal loan.