Consolidate Your Debt with a Personal Loan!

 

Do you feel overwhelmed by multiple debts with high interest rates and different due dates? If so, you are not alone. According to the Federal Reserve, the total household debt in the US reached $14.96 trillion in the second quarter of 2021, with credit card debt accounting for $770 billion of that amount.

Debt consolidation is a strategy that can help you simplify your finances and save money on interest. It involves combining multiple debts into one single loan with a lower interest rate and a fixed monthly payment. This way, you can pay off your debt faster and easier, while reducing the stress and hassle of managing multiple bills.

One of the options for debt consolidation is a personal loan. A personal loan is an unsecured loan that you can use for any purpose, including consolidating your debt. Unlike a secured loan, a personal loan does not require any collateral, such as your home or car, to back it up. However, this also means that you need to have a good credit score and income to qualify for a personal loan with favorable terms.

In this article, we will explain the benefits of using a personal loan for debt consolidation, how to choose the best personal loan for your situation, how to apply for a personal loan for debt consolidation, and how to manage your debt after consolidating with a personal loan.

Benefits of Personal Loans for Debt Consolidation

Personal loans offer several advantages over other types of debt, such as credit cards, payday loans, or student loans. Here are some of the benefits of using a personal loan for debt consolidation:

• Lower interest rates: Personal loans typically have lower interest rates than credit cards and other types of debt. According to Bankrate, the average interest rate for a 24-month personal loan was 9.46% in August 2021, while the average interest rate for a credit card was 16.30%. By consolidating your debt with a personal loan, you can save hundreds or thousands of dollars in interest over time.
• Fixed monthly payments: Personal loans have fixed monthly payments that are easier to budget and manage. You know exactly how much you need to pay each month and when your loan will be paid off. This can help you avoid missing payments or paying late fees, which can hurt your credit score and cost you more money in the long run.
• Shorter repayment terms: Personal loans have shorter repayment terms than credit cards and other types of debt. The average repayment term for a personal loan is 3 to 5 years, while the average repayment term for a credit card is 10 to 15 years. By consolidating your debt with a personal loan, you can get out of debt faster and save money on interest.
• Potential to improve your credit score: Consolidating your debt with a personal loan can also improve your credit score in several ways. First, it can reduce your credit utilization ratio, which is the percentage of your available credit that you are using. A lower credit utilization ratio can boost your credit score, as it shows that you are not relying too much on credit. Second, it can diversify your credit mix, which is the variety of credit accounts that you have. A more diverse credit mix can improve your credit score, as it shows that you can handle different types of credit responsibly. Third, it can improve your payment history, which is the most important factor in your credit score. By making consistent and timely payments on your personal loan, you can demonstrate your ability to repay your debt and increase your credit score.

How to Choose the Best Personal Loan for Debt Consolidation

Not all personal loans are created equal. There are many lenders in the market that offer different rates, fees, terms, and features for their personal loans. To choose the best personal loan for debt consolidation, you need to compare different offers and find the one that suits your needs and goals. Here are some steps to follow:

• Compare different lenders and their offers: The first step is to shop around and compare different lenders and their offers based on interest rates, fees, loan amounts, repayment terms, and eligibility criteria. You can use online tools such as Bankrate or NerdWallet to compare multiple lenders at once and see their reviews and ratings from other customers. You can also check with your local bank or credit union to see if they offer any special deals or discounts for their existing customers.
• Check your credit score and report: The second step is to check your credit score and report before applying for a personal loan. Your credit score and report will determine if you qualify for a personal loan and what rates and terms you can get. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once every 12 months through AnnualCreditReport.com. You can also get a free estimate of your credit score from various websites or apps such as Credit Karma or Credit Sesame.
• Use a debt consolidation calculator: The third step is to use a debt consolidation calculator to estimate how much you can save by consolidating your debt with a personal loan. A debt consolidation calculator will ask you to enter information such as your current debts (balance, interest rate, monthly payment), the personal loan offer (interest rate, fees, term), and your monthly income and expenses. It will then show you how much you will pay each month on the personal loan versus your current debts, how much interest you will save over time, and how long it will take you to pay off the personal loan versus your current debts.
• Consider other factors: The fourth step is to consider other factors besides the numbers when choosing a personal loan for debt consolidation. For example, you should consider the customer service quality of the lender, the online access and convenience of the application process, and the flexibility of payment options such as autopay or deferment in case of financial hardship.

How to Apply for a Personal Loan for Debt Consolidation

Once you have chosen the best personal loan for debt consolidation, the next step is to apply for it. The application process may vary depending on the lender, but generally it involves these steps:

• Gather the necessary documents: The first step is to gather the necessary documents that the lender will require to verify your identity, income, and address. These may include:

  • A valid government-issued ID such as a driver’s license or passport
  • A recent pay stub or tax return as proof of income
  • A bank statement or utility bill as proof of address

• Fill out an online application form or visit a branch: The second step is to fill out an online application form on the lender’s website or app, or visit a branch of the lender if they have one near you. You will need to provide information such as:

  • Your name, contact details, and social security number
  • Your desired loan amount, purpose, and term
  • Your current debts (balance, interest rate, monthly payment)
  • Your income, expenses, and employment status
  • Your consent to a hard credit inquiry, which may affect your credit score temporarily

• Wait for approval and verification of your information: The third step is to wait for approval and verification of your information by the lender. This may take from a few minutes to a few days depending on the lender and their underwriting criteria. Some lenders may approve you conditionally based on the information you provided, and then ask you for additional documents or verification later.

• Receive the funds in your bank account or use them to pay off your existing debts directly: The fourth step is to receive the funds in your bank account or use them to pay off your existing debts directly. Some lenders may deposit the funds in your bank account within one business day after approval, while others may take longer. Some lenders may also offer direct payment options, where they will send the funds directly to your creditors instead of giving them to you. This can save you time and hassle, and ensure that you use the funds for their intended purpose.

Tips to Manage Your Debt After Consolidating with a Personal Loan

Consolidating your debt with a personal loan is only half of the battle. The other half is managing your debt after consolidating with a personal loan. If you are not careful, you may end up in more debt than before or miss out on some of the benefits of debt consolidation. Here are some tips to help you manage your debt after consolidating with a personal loan:

• Create a realistic budget and stick to it: The first tip is to create a realistic budget that reflects your income and expenses, and stick to it. A budget will help you track where your money is going, how much you can afford to spend on each category, and how much you can save or invest each month. A budget will also help you avoid overspending or impulse buying, which can lead to more debt.

• Avoid using your credit cards or taking on new debt until you pay off your personal loan: The second tip is to avoid using your credit cards or taking on new debt until you pay off your personal loan. If you use your credit cards again after consolidating them with a personal loan, you will end up with more debt than before, and negate the benefits of debt consolidation. If you need to use your credit cards for emergencies or essential purchases, make sure that you pay off the balance in full every month, and do not carry any balance over.

• Make extra payments or pay more than the minimum whenever possible: The third tip is to make extra payments or pay more than the minimum whenever possible on your personal loan to reduce the interest and shorten the loan term. By paying more than the minimum, you can save money on interest and get out of debt faster. You can also make extra payments whenever you have extra cash, such as a bonus, a tax refund, or a gift. You can use online calculators to see how much you can save by making extra payments or paying more than the minimum on your personal loan.

• Monitor your credit score and report regularly: The fourth tip is to monitor your credit score and report regularly to track your progress and spot any errors. You can check your credit score and report for free from various websites or apps, such as Credit Karma or Credit Sesame. You can also get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once every 12 months through AnnualCreditReport.com. You should review your credit score and report at least once a year to see if your debt consolidation strategy is working and if there are any errors or discrepancies that need to be corrected.

Conclusion

Debt consolidation is a smart way to simplify your finances and save money on interest. Personal loans are one of the options for debt consolidation that offer many benefits, such as lower interest rates, fixed monthly payments, shorter repayment terms, and potential to improve your credit score. However, to choose the best personal loan for debt consolidation, you need to compare different lenders and their offers, check your credit score and report, use a debt consolidation calculator, and consider other factors besides the numbers. You also need to apply for a personal loan for debt consolidation and follow some tips to manage your debt after consolidating with a personal loan.

If you are interested in consolidating your debt with a personal loan, you can start by comparing different offers from our trusted partners below. You can also read more articles on our blog to learn more about personal finance and debt management.