Can I consolidate debt with a personal loan?
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UPDATED: Dec 1, 2011
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One of the great things about personal loans is that the money is yours to do with as you please. As a result, personal loans are great tools for consolidating debt.
Get Out of Debt Traps
Imagine you have a credit card bill that you’re making the minim um monthly payments on. You’re keeping current on your payments, but the interest continues to compound. If you qualify for a personal loan, you pay off your credit card in order to stop the compounding interest rates. Since personal loans typically come with rates between 6 and 12 percent, you may very well wind up reducing your interest rate on your outstanding debt too.
Plus, your monthly payments will become fixed instead of fluctuating depending on what your credit card’s debt is for any given pay period.
An even more volatile example is that of a payday loan trap. While payday loans can be helpful tools for emergencies or unexpected bills, they must be paid off before rolling over too many times. If they’re not paid off, the borrower often finds themselves in a debt trap that makes credit card debt look pleasurable.
If one finds themselves sinking in payday loan quicksand, a personal loan could prove to be the rope that will pull them to safety. The catch—many payday loan borrowers use payday loans because their credit is poor, and you need to qualify for a personal loan with good credit. But if able to, this form of financing is a wonderful debt consolidation tool.
Is a Personal Loan the Right Choice?
The nice thing about personal loans is they are unsecured. As a result, you do not need to own a house, or put your vehicle up as collateral. You don’t need any capital to take them out so long as a lender approves you for the loan.
But as a result of their unsecured nature, this form of financing does come with relatively high interest rates. Granted those rates are likely lower than most debt traps borrowers find themselves in.
When applying for a personal loan, don’t check with just one lender. Search around for the best interest rates by using online forms that forward your information to multiple lenders at once. That way you can be sure you’re getting fair and competitive rates.