Can You Use Personal Loans to Consolidate Debt?
Many consumers are unaware that a personal loan, considered among the most flexible options for borrowers with good credit, can be used to pay off your original loans. Personal loans are designed to help you lower your interest payments and, with one monthly payment, make it simpler for you to start taking control of your finances. Though terms may vary, personal loans can give you greater control over how to distribute your funds. They have several caveats and rules and so can be more difficult to get than additional credit from a credit card company. But for those who qualify, personal loans can offer the fastest way to financial stability.
Types of Personal Loans
Personal loans are classified as secured or unsecured. A secured personal loan requires you to put up collateral for the money you are planning to borrow. The more common, unsecured personal loan is guaranteed by your credit and does not usually require collateral, like your house or your car.
Benefits of Using Personal Loans for Debt Consolidation
The most difficult part of dealing with debt can be the sheer mass of paperwork that you need to wrap your head around. By the time it takes you to get a handle on what you actually owe, and how much you’re losing as in interest rates, you may have dug yourself deeper into debt. For unsecured personal loans, you can apply without affecting your credit score and, once you’re approved, you can use the funds to pay off credit card balances, medical bills, or any other types of debt.
The greatest advantage of personal loans is that they allow you to simplify. Personal loans require one only one (rather than many, sometimes confusing) monthly payments and their interest rate may be lower than the average credit card loan.
Because the process of securing a personal loan is considered among the more stringent, it usually doesn’t require you to include any collateral. That means that you don’t need to worry about what asset you can spare if you default. Instead, the very asset that you’re planning to use the money for, such as car or mortgage payments, are seen as the collateral. As such, they will be repossessed by the lender if the contract is not fulfilled on your end.
Lenders include banks as well as online websites. But interest rates, fees, contract terms and other details can vary drastically from one lender to another, so it’s always recommended to shop around and get a sense of what’s out there. For example, make sure to check if the interest rates or fees are fixed or variable, all of which can make a huge difference in the long run. Check for penalties or, alternatively, financial incentives for paying off a loan quickly.
Like any debt relief program, personal loans also carry some downsides. The most obvious is the unsecured, more common version is available only to those with a decent credit score. They’re also not qualified for the same tax breaks as, for example, student loans, so it’s best to check into those details to try to strategize for the long-term.
Do keep in mind, moreover, that if you don’t have the credit required for the personal loan contract, collateral may be asked of you.