3 Times to Consolidate Your Debt Using a Personal Loan
by Elizabeth Aldrich | June 18, 2019
The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.
Image source: Getty Images
Juggling multiple payment due dates, interest rates, and open balances makes it easier to drop the ball and miss a payment. One slip-up, and you can damage your credit score for years, and mounting late fees can wreak havoc on your finances.
Debt consolidation loans allow you to combine multiple loans into a single loan, simplifying the payment process and giving you access to additional benefits. While consolidating debt with a personal loan has its pitfalls, it can also be a financial life-saver when you're drowning in debt. Here are a few times when you should consider consolidating your current debt using a personal loan.
1. You can lower your interest rate
If you have good credit, you may qualify for a low-interest personal loan that allows you to pay off your balance at a lower rate than your existing debt. This is the best reason for consolidating your debt, because it can save you a significant amount of money. Let's say you're paying off balances on three credit cards with respective interest rates of 14%, 16%, and 17%, but you qualify for a personal loan with an interest rate of 10%. By consolidating, you stand to save hundreds -- if not thousands -- on interest over time.
Most lenders require you to have "fair" or "good" credit -- typically a FICO® Score between 580 and 739 -- and will base your interest rate on your credit history. If your credit score needs a little work, you can give it a boost by reviewing and disputing any inaccuracies on your report and by paying off some of your current debt. You can also wait to apply for the new loan until a negative mark falls off your report, which in most cases happens seven years after the date of the original delinquency.
Be aware that the lender may also charge an origination fee (usually 1% to 5% of the total loan) to cover the cost of processing the new loan. So make sure this fee doesn't outweigh the potential interest savings before signing on the dotted line.
The Ascent's picks of the best personal loans
Looking for a personal loan but don't know where to start? The Ascent's picks of the best personal loans help you demystify the offers out there so you can pick the best one for your needs.
2. You need to simplify your monthly payments
One of the more obvious benefits of debt consolidation is simplification: When you consolidate, you only have to keep up with one monthly payment. However, streamlining the payment process isn't a good reason to consolidate if you'll end up with a higher interest rate. Remember, a higher interest rate means a more expensive loan and likely a longer repayment period. It might make your life easier now, but it's not worth spending extra money on interest just to have a single due date to remember each month.
3. You can't make your monthly payments
Consolidating your debt with a personal loan can help lower your monthly payments by extending the length of your loan. No one wants to increase their interest rate or extend the time it takes them to pay off debt, but if you simply can't make your minimum monthly payments, consolidation can help you avoid defaulting on the loan, which can lead to consequences more dire than an extended repayment period.
Consider other options
Debt consolidation with a personal loan isn't the right solution for everyone, so consider exploring alternative options. You may be able to find a credit card balance transfer offer that serves you better. Some offer low or 0% interest rates for a set period of time, but you'll need good credit to qualify. If you go this route, it's crucial to pay off the balance before the promotional period ends (usually 15 to 21 months) to avoid the high regular interest rate.
You may also want to consider a home equity loan, which may get you a lower interest rate by using the equity in your home as collateral. Just know that you'll be putting your home at risk if you can't make your monthly payments.
Debt consolidation is a valuable tool if you're struggling to make your required payments or can take advantage of a lower interest rate. Weigh each of your options and make sure you understand any associated fees before moving forward with a new personal loan.
Our Picks of the Best Personal Loans for 2021
We've vetted the market to bring you our shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.
About the Author
Elizabeth is a writer specializing in credit cards, debt repayment, and small business. Her work has also appeared on MSN Money, Yahoo! Finance, and Business Insider.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
