3 Times to Consolidate Your Debt Using a Personal Loan

Using a personal loan to consolidate debt isn't always the right decision. But if you find yourself in one of these situations, it probably is.
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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.

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.

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