If you're tired of making minimum payments and are committed to paying down your debt, then you may want to consider consolidating your debt with a personal loan. By using a personal loan to consolidate your debt, you end up with one monthly bill instead of the several you are currently juggling every four weeks.
If you qualify for a personal loan, then you can use that unsecured loan from your bank or credit institution to pay off your credit cards. This strategy is a version of debt consolidation that offers many benefits, but also has a few disadvantages. When you apply for a personal loan, the loan you'll qualify for and your interest rate will depend on several factors, including your income and credit score.
If you receive loan approval, then you can use the extra cash to pay off your credit cards. Some loans work automatically and instantly pay off your credit card debt, while others will require you to pay off the credit cards by yourself. After you consolidate your credit cards, you'll wind up owing money to just one lender instead of several, and that could bring down your interest rate and overall monthly payment. Decreasing your interest rate and monthly payments are only two possible advantages to debt consolidation.
To help you better understand the advantages and disadvantages of paying off your credit cards with a personal loan, we'll list the pros and cons of this action below. First, we'll start with the pros.
When it comes to using a personal loan to consolidate debt, you'll discover that there are several potential advantages. These pros include the following:
#1: Your monthly interest rate could decrease
Since personal loans offer lower interest rates than credit cards, you might wind up paying less over time. If your credit is high enough to help you get a low-interest personal loan, you will save money on your repayment over time. Remember that the interest rate you'll receive on your loan will depend on your credit, debt-to-income ratio, and your current employment.
#2: You'll have one monthly payment instead of several
Not surprisingly, it's easier to handle your debts and fees when you only have one bill to worry about instead of many.
#3: You could lock in that much lower interest rate
Some loans only offer variable interest rates, meaning the loan's rates are affected by a financial index. If that index rate increases, your rate increases, too. Instead of getting a variable rate, find a personal loan that offers a fixed-rate so that you'll have the same monthly payment to pay each month. While personal loans can have low-interest rates, the Consumer Financial Protection Bureau tells us you should still find out your maximum rate since those rates could change.
#4 You can pay down debt more quickly
With a personal loan, you should receive a lower interest rate and a reduced monthly bill overall. So, every payment you make will cut into the debt you owe faster instead of disappearing because of interest. Most people can pay off personal loans within a few years.
#5 You can increase your credit score
If you have a lot of credit cards, paying them off with a personal loan should boost your credit rating. Plus, as long as you keep making your monthly payments on time, your credit should continue to improve. While your credit score won't go up massively, and it will happen over time, it's still nice to see improvement.
Since we covered the pros of using a personal loan to consolidate debt, we now need to cover the cons. While there are several benefits to a personal loan, if you want to consolidate debt, not everybody that applies for a personal loan will be offered an interest rate or assistance that could make the process beneficial for them.
#1: Your Interest Rate Could Increase
If you apply for a personal loan, you won't get a guarantee that your overall interest rate on your debt will be any lower than it is now. Consolidating your debts with a poor interest rate can increase the amount you'll have to spend when you repay it. If you'd like some assistance figuring this out, take a look at a debt repayment calculator.
#2 If You Use the Credit too Early, Your Mountain of Debt Could Increase
Depending on the type of personal loan you qualify for, once you reset your credit cards to zero, you might feel the urge to use them again. However, you need to resist that temptation. If you start using more debt before you pay off your consolidated debt, you could wind up with a vast mountain of debt.
#3 You Might Get Slammed with Fees
Unfortunately, some companies will make you pay several fees if you want to receive a personal loan. While much of this relies on the lender, you might wind up acquiring an extensive list of costs that you owe. These costs could include application fees, prepayment penalties, etc. Sometimes those fees make the idea of consolidation more expensive than just paying off your credit cards.
Using a personal loan to pay down your debt could benefit you if you can get a low-interest rate and some favorable terms. Luckily, personal loans aren't the only solution when it comes to paying off debt. If you cannot qualify for a personal loan, you could consider other alternatives, like another credit card that allows for balance transfers, a loan from a friend or family member, or contact a reputable debt relief company to discuss your situation and what options they may be able to offer.