Debt consolidation simplifies repayment and may result in a lower interest rate by combining all of your debts into one payment.
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You might not know how to get out from under debt if you have any. Fortunately, you can pay off your current debts and potentially lower your interest rate by using a debt consolidation loan, which is a type of personal loan. In the right circumstances, they can streamline your payoff strategy.
Consolidating your debts into a single payment by obtaining a new credit card or personal loan is known as debt consolidation. After obtaining the loan, you settle your current debts and begin making monthly loan payments.
Debt consolidation may be able to help you get a better interest rate, make smaller monthly payments, or pay off your debt faster. Notwithstanding these advantages, the fact that debt consolidation streamlines your finances is one of its main benefits. You only have to worry about one payment each month rather than several debts to pay off.
However, debt consolidation is a long-term solution for financial issues such as debt relief. Organizing debt into a more manageable loan through consolidation doesn’t make it go away; rather, it can help you stay on top of your monthly payments.
For example: Let’s say you have three loans totaling $12,000. Your average personal loan interest rate is 19%. These loans will be repaid in 24 months, with a total monthly payment of $605 for the three loans. You will have repaid the loans and the interest totaling $2,518 after two years.
But let’s say you learn that a personal loan costing just 14 percent can help you combine your debt. 5% interest. You will pay $579 a month for the same 24-month repayment period to pay off your $12,000 debt. And with your new loan, your interest would only be $1,896 over a 24-month period.
Personal Loans
Installment loans such as personal loans can be used for almost anything, such as wedding expenses, home repairs, adoption fees, back taxes, and more.
The entire amount of the loan will be given to you in one lump sum, and you will then pay back the loan over time in monthly installments until it is fully repaid. Since most personal loans are unsecured, you most likely won’t need collateral to obtain the loan, and interest rates are determined by the borrower’s credit history and score.
- Wide range of borrowing and repayment options
- No collateral required for most types of personal loans
- Interest rates are usually fixed, so monthly payments are predictable
- There are no set standards for eligibility; each lender and type of loan is unique.
- Typically, in order to get the best interest rates, one must have a high credit score.
- Various minimum loan amounts could result in you having more money than you require.
Debt Consolidation Loan
One kind of loan used to combine debt is a debt consolidation loan. Debt consolidation loans are widely advertised as a way for borrowers to streamline payments and ultimately save money on interest by consolidating any type of debt they may have.
With a debt consolidation loan, you can borrow the same amount of money to pay off all of your outstanding debts at once. After that, you make a single monthly payment on your new loan, which has a different interest rate and repayment schedule that is usually cheaper than your current APRs.
A debt consolidation loan may or may not save you money, even though it simplifies payments by combining them into one. You might eventually owe the same amount of interest if you choose a very long repayment period. Compute the cost to see how much it will cost throughout the loan term.
- Streamlines outstanding debt into a single monthly payment
- Over the course of the combined loan, you will pay less interest than if you had to repay multiple loans at once, each with a different interest rate.
- Your available credit may be increased by using a consolidation loan to pay off outstanding credit card debt.
- Completing a loan application can result in a hard inquiry, which can temporarily lower your credit score.
- The approval of a loan is contingent upon various factors such as your income, debt-to-income ratio, and credit score.
- Getting a new loan lowers your average credit age, which affects your credit score as well.
Personal Loan vs. Debt Consolidation Loan: Which One to Choose?
Recall that business or personal loans can be used for debt consolidation. Any debt consolidation loans you apply for will probably be personal loans unless you’re taking one out on behalf of a business. Because of this, the one you should choose will depend on why you need the loan.
You’ll want to get a debt consolidation loan if you:
- possess numerous outstanding loans with high interest rates, which ultimately cost you more money and time.
- can locate a debt consolidation loan with an interest rate that is less than the interest rate on the debt you are currently repaying?
- Want to consolidate multiple outstanding loan payments into a single monthly payment?
If you need money for any kind of unexpected expense, like an emergency home repair, auto maintenance, a down payment on a wedding venue, or something else entirely, you might be better off applying for a different kind of personal loan. You might be able to take out multiple personal loans at once if your credit is good enough and you can afford to make all of the payments.
How Do I Qualify for a Debt Consolidation Loan?
A debt consolidation loan for an individual borrower will usually be in the form of an unsecured personal loan. This means that the factors that determine your eligibility are your debt-to-income (DTI) ratio, employment status, and credit score and history. Your eligibility may also depend on the amount you need to borrow and the terms of repayment that you can expect.
Can I Get a Debt Consolidation Loan if I Have Bad Credit?
Although qualifying requirements vary from lender to lender, generally speaking, a higher credit score increases your chances of being eligible for the best available interest rate. Although your loan application won’t necessarily be denied if you have a low credit score, you will probably pay a higher interest rate.
Do Debt Consolidation Loans Affect Your Credit Score?
A hard inquiry happens when you submit an application for a loan because the lender obtains your credit report to verify your credit history and score. Your credit score will momentarily decline as a result of this and the new loan, which will shorten the average age of your credit history. However, if you make on-time payments for a few months, your credit score should improve. If you miss or make late payments, your score will probably decrease even more.
How Long Does Debt Consolidation Stay on Your Record?
For as long as the account is open, your debt consolidation loan will remain on your credit report. In addition to debt settlement agreements, missed payments, delinquent accounts, and defaulted accounts can remain on your credit report for seven years or for as long as it takes to pay off your outstanding debt.
How People Use Personal Loans?
Investopedia commissioned a national survey of 962 U. S. adults between Aug. 14, 2023, to Sept. 15, 2023, to find out how they used the money from their personal loan and how they planned to use additional personal loans. The most frequent reasons people took out loans were for debt consolidation, then for home renovations and other significant purchases.
The Bottom Line
In addition to making payments easier to manage, using a debt consolidation loan to pay off outstanding loans can be a wise strategy to lower the amount of interest you would otherwise pay over time. You can use a personal loan to pay for additional needs if you require money for something other than debt consolidation.
Before applying for any kind of loan, be sure to weigh your options because each lender has different qualifying requirements. Article Sources: Investopedia mandates that authors cite original sources to bolster their claims. These consist of government data, original reporting, white papers, and conversations with professionals in the field. When appropriate, we also cite original research from other respectable publishers. You can read more about the guidelines we adhere to when creating impartial, truthful content in our
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FAQ
Is it better to get a personal loan or consolidate debt?
Most personal loans can be used for several potential purposes. But if you’re drowning in debt—credit card debt, hospital bills, or anything else entirely—loans for debt consolidation can help you make repayment easier.
Are there any disadvantages to consolidating debt?
Additional costs could apply. Debt consolidation can be expensive. Origination fees, which are normally 1% to 10% of the total loan amount and are normally included in the loan’s annual percentage rate, can be included in debt consolidation loans.
What is a better option than debt consolidation?
When you have exhausted all other options, including filing for bankruptcy, you may want to think about debt settlement as an alternative to a debt consolidation loan. Negotiating with lenders in the hopes that they will accept less than what you owe them is part of the process. For a fee, debt settlement firms can handle the procedure on your behalf.
Does getting a personal loan to consolidate debt hurt your credit?
Consolidating your debts correctly could temporarily lower your score. Every time you apply for credit, a hard inquiry that shows up on your credit reports will cause a decline. However, Experian claims that the drop is typically less than five points, and your score should increase again in a few months.
Read More :
https://www.investopedia.com/personal-loan-debt-consolidation-loan-difference-7505351
https://www.experian.com/blogs/ask-experian/is-a-personal-loan-the-same-as-a-consolidation-loan/