6 Reasons a Personal Loan Is Ideal for Debt Consolidation

The right personal loan could make your debt a lot cheaper and easier to pay off.

Personal loans can be used to consolidate debt. This means you take out one new personal loan and use it to repay multiple existing creditors. You can use a personal loan to pay off credit cards, medical debts, other personal loans, and more.

But why would you want to do this? Here are six key reasons why a personal loan may be the ideal tool to use for consolidating your debt.

1. You can use the loan proceeds for anything you'd like

Most personal loan providers offer tremendous flexibility in what you can use the borrowed money for. They may not even ask what you'll do with the loan proceeds.

As a result, after you've borrowed, you're free to pay off pretty much any debt you want, from credit cards to medical debt to other personal loans.

2. Personal loans often offer competitive interest rates

The interest rate on a personal loan is often well below the rates on other common types of debt, such as credit card debt.

If you can reduce the interest rate on your borrowed funds, then repayment should be cheaper over time because you won't have to give the lender as much money for the privilege of access to credit.

3. Many personal loans allow you to borrow a large sum

It's often possible to borrow a large amount of money when taking out a personal loan -- sometimes as much as $50,000 or $100,000, depending on your income and other financial qualifications.

Since you can borrow a lot, you should hopefully be able to use the proceeds from your personal loan to pay off most or all of your outstanding debt. This will simplify the debt consolidation process since you won't have to choose which debts to repay with your consolidation loan, and you won't be left with multiple creditors when you're done with the process.

4. You can lock in your interest rate with a personal loan

Many lenders allow you the option to choose a fixed-rate personal loan. If you're refinancing variable-rate debt to a fixed-rate loan, you'll no longer have to worry about rates rising and your debt becoming more expensive.

You'll have complete certainty regarding what you'll pay each month because your monthly payments and loan costs won't ever change.

5. Personal loans come with fixed repayment schedules

When you apply for a personal loan, you will decide on a set timeline for repaying your personal loan, such as three years or five years. This timeline will not change once you've signed your loan agreement and committed to borrowing.

As a result, you will know exactly when you'll complete your debt payoff plan and will be free of all of the debt you’ve consolidated.

6. You don't usually put assets at risk when taking out a personal loan

Typically, you'll use an unsecured personal loan when consolidating debt. That means you do not need to use any assets as collateral -- unlike with something like a home equity loan, where your house secures the loan.

Each of these advantages sets personal loans apart from other debt consolidation options, such as home equity loans or balance transfers. If you're hoping to consolidate debt this year, a personal loan should be considered when you're deciding what new credit to take on to pay off your existing lenders.