How Personal Loans Can Help You Solve a Common Debt Payback Dilemma

If you're struggling with a debt payback plan, this advice could help.

If you are working on paying back debt, chances are good that you'll be faced with a difficult choice. Most likely, you will owe multiple different creditors money. For example, you might have several credit cards that have balances you must pay back. You might even have other loans like installment or payday loans.

There are lots of different theories on which debt you should repay first. Some experts, like Dave Ramsey, suggest focusing on first paying off debts with low balances because you'll get a morale boost when those are paid in full. This is the debt snowball method. But others believe the best method of becoming debt free ASAP is to focus on loans with high interest rates because those are the most expensive. This is the debt avalanche method.

It can be a challenge to decide which of these theories to follow. And, no matter what you do, you're either going to be working on just one of many debts or find yourself spreading your money so thin you don't make much progress on paying down anything.

If you want to avoid this issue, though, there's a different approach you can take. And a personal loan is central to it.

How a personal loan can solve this debt payback issue

A personal loan can help you to solve the conundrum of what debt to focus on first. It can also enable you to avoid the feeling that you're making progress on just one debt when you have many.

Here's how: You can take out a personal loan, ideally at a competitive interest rate. Once the lender deposits the money from your loan into your bank account, you can use those funds to pay off other debts. Ideally, your loan will be for enough money that you can pay off everything else you owe. If it is, you can change many debts into just one big loan. And, ideally, you will be paying off debts that have a higher interest rate than your new personal loan.

This approach is called debt consolidation, and it can make loan payoff faster, simpler, and easier to manage. Since you are going to have only one loan to pay, each payment you make is going to feel like you're making real progress on dealing with all your debt so you're likely to feel a lot more motivated. And if you want to make extra payments beyond the minimum, there will be no hard choices to make -- you can just send all that extra cash to your personal loan.

Is consolidating debt with a personal loan a good option for you?

Consolidating debt with a personal loan makes a lot of sense in many situations. You do, however, have to make sure of a few things.

First, you don't want to use personal loan proceeds to pay off debt that is currently at a lower rate than the loan. If you have a credit card with a 0% introductory APR and you're working on paying it down, repaying that balance with a loan that charges a 9% rate wouldn't be a smart choice, since you'd increase your financing charges.

And second, you don't want to make your payoff time a lot longer. If you're on track to pay off a loan in a year, consolidating it into a loan with a five-year repayment timeline wouldn't make sense since you'd pay more interest over time.

Outside of these situations, a personal loan may be just the solution you're looking for if you're struggling to find a debt payoff approach that works for you.