Is Consolidating Your Debt With A Personal Loan Right For You?

Debt could have both a financial and an emotional impact on your life. Sometimes, it’s not just about the dollar amount that you owe but also the number of bills that you need to keep track of each month.

If you’re sick of logging into five or more accounts on different dates, you might be ready to get a personal loan for debt consolidation.

What Is Debt Consolidation?

Debt consolidation loans allow you to take your existing debt and refinance it into a new loan with a single monthly payment. After refinancing, you then continue to make loan payments on just one account.

Some people are attracted to the idea that they could turn their bills into one consistent monthly payment. It could make debt easier to manage – and potentially pay off if you stay on top of your payments every month.

Shopping for a personal loan with a lower interest rate may be a viable option for dealing with your debt. When you find a personal loan with a competitive Annual Percentage Rate (APR) and use it to pay off your other debt, it could lower your total payments over time.

Many people use debt consolidation to pay off high-interest credit card debt or other types of loans. However, while the process of debt consolidation is one way to help with debt repayment, it does have both benefits and drawbacks.

Benefits of Consolidating Your Debt With a Personal Loan

Since the goal of consolidation is to eventually eliminate your debt, you may want to keep your credit cards on a high shelf until your loan is paid off. When you’re in control of your spending and credit usage, you could enjoy the pros of debt consolidation:

Drawbacks of Consolidating Your Debt With a Personal Loan

Debt consolidation has some drawbacks if you are not a responsible spender or have a low credit score.

You may encounter some of these cons to taking out a personal loan for debt consolidation:

When You Could Consider Debt Consolidation

There are certain financial situations that are most appropriate for a debt consolidation loan. Borrowers who meet these criteria often find it easier to secure a personal loan to pay off debt, as well as to make the monthly loan payments.

In general, a debt consolidation loan makes sense financially if:

So, how could you tell if a personal loan will help you financially? First, review the list above. Next, review your finances and creditworthiness.

Personal loan lenders are more likely to approve borrowers with an excellent or good credit score. Lenders like to see a proven track record of on-time payments before they extend additional credit.

When You Should Not Consolidate Your Debt With a Personal Loan

Alternative Debt Repayment Methods to Personal Loans

If getting a personal loan to pay off debt doesn’t seem like the best idea right now, please don’t worry. There are other repayment plans you could consider in 2022 and beyond.

Here are the top three alternative repayment methods:

These aren’t loan options, but they are effective ways to pay down your debt until it’s a more manageable amount. As you pay down your debt, you may find yourself in a situation where a personal loan makes sense, so review your plan and revisit your options throughout your debt payoff journey.

Credit Card Balance Transfer

If you have multiple credit cards, you’ve probably noticed an option to transfer your debt from one credit card to another. There may be a balance transfer fee associated with this option, so pay special attention to the fine print. Look for a balance transfer credit card to start the process.

When you open a credit card with a lower interest rate and transfer the loan balance from your existing cards with higher interest rates, you could pay down your debt more quickly while also boosting your credit score over time through timely payments.

Debt Snowball

Many financial experts tout the potential benefits of the debt snowball method. This method is a pretty simple strategy for paying off debt strategically.

First, list your credit cards in order from the one with the lowest balance to the one with the highest balance. This helps the debt seem more manageable.

Make your minimum monthly payments on each card, then pay a larger sum towards the card with the lowest balance. Continue this process until you’ve paid off the first card, then repeat with the next lowest balance.

As you pay off each card, you’ll free up more cash in your budget, creating the “snowball” effect. If you struggle with motivation, the debt snowball method is a one way to pay debt down quickly.

Debt Avalanche

The debt avalanche method is similar to the debt snowball, but the mentality is a little different. First, list your debts in order from the one with the highest interest rate to the one with the lowest interest rate. This method focuses on financial savings.

The debt avalanche method is similar to the debt snowball, but the mentality is a little different. First, list your debts in order from the one with the highest interest rate to the one with the lowest interest rate. This method focuses on financial savings.

This method saves money in interest, which makes your debt more manageable over time. If you want to pay less interest over the life of the loan, the avalanche method is the way to go.

Choosing a Personal Loan for Debt Consolidation

So, where to begin your debt consolidation quest? You could start by checking the Annual Percentage Rates (APRs) on your existing debts. Find out which one has the lowest APR, and then make it your goal to find an even lower APR on a personal loan.

Next you’ll want to find a lender that offers debt consolidation loans. These lenders fall into multiple categories but the most common examples are online lenders, banks and credit unions.

Splash Financial is one example of an online lender that can provide personal loans to those looking to consolidate debt. If you’re in good credit standing and in need of debt consolidation, review some of the offerings that might be available to you.