The Pros & Cons of Personal Loans for Debt Consolidation
January 2, 2020
In 2019, the national debt reached a record-breaking $22.22 trillion dollars. On an individual level, consumer debt began approaching $14 trillion earlier in this same year. Between home, automotive, student loans, and credit card debt, people are looking for ways to bring this figure down to emancipate themselves and make different decisions with their money.
One of the ways people seek freedom is by consolidating their different loan balances into one personal loan and paying down that singular debt rather than splitting payments across different accounts. Today, we’re tackling the benefits and shortcomings of debt consolidation through personal loans to show more options if plural streams of debt is keeping you from financial freedom.
How does debt consolidation work?
Debt consolidation is a method of transferring all of your debt balances into one unified loan or credit provider. As mentioned previously, it’s not uncommon for people to accumulate debt from different loan providers. Even more, it’s also likely each provider has lent you money with different interest rates on your payment plan.
You may have gotten a great deal on your mortgage but a not so wonderful interest rate on your credit card. Or, maybe you have multiple credit cards with balances that you’re struggling to pay individually each month? Regardless of what comprises your loans, over time, interest rates can become difficult to keep track of. Unifying your loans into one centralized payment can help make payments more manageable.
Pros and cons of debt consolidation
If you’re considering debt consolidation by way of a personal loan, you’ll want to consider all the ways this option will and will not work for you. Here are some preliminary pros and cons you may want to keep in mind as you decide what is best for you:
- You may be eligible for a better interest rate — Depending on your credit score, you may be able to be granted a personal loan with an interest rate that beats out the interest rate of your other loans.
- One provider rather than several — Having one loan provider means having one lender to communicate and make payments to. This might be a great option if you’re not great at keeping track of multiple payment deadlines or if you’re forgetful about the finer details of each loan or debt.
- Avoid filing for bankruptcy — In more extreme scenarios, those who cannot pay their debts file for bankruptcy. While this option may make debt or loan discharge possible and offer a second chance to those who are truly in financial trouble, it can also devastate the credit of those who file. Debt consolidation through a personal loan can offer another opportunity to make your payments more manageable.
- No guarantee for a better interest rate — Generally, lower interest rates are granted to those with good credit because their provider trusts that they are not a risk to loan to. If you have bad credit, however, lenders may see you as a risk. If you’re in this boat, check out our tips and habits to help raise your credit score.
- Defaulting on a consolidated loan could mean trouble — Your loan consolidation is a way to help make moments of trouble a little less perilous. However, defaulting on your consolidated loan might create more trouble for you in the long run, affecting your credit. You’ll want to be sure that loan consolidation is your best option before proceeding.
- Personal loan denied — Depending on your credit score, borrowing history, loan provider, and more, you may not be eligible for a personal loan or for the full amount you need to totally consolidate your loans.
Although there are many ways to consolidate debt, a personal loan offers debtors a way to pay off their balance—sometimes with a fixed interest rate. If this sounds like the right option for you, you’ll want to speak directly with providers about your specific case to make sure you’re finding the right people to help you through your repayment. As you proceed, be sure you pick whatever works best for you!
Having trouble dealing with credit card debt?
Not to worry. We’ve compiled a list of steps and tips to help you face your credit card debt at a slow and steady pace. Learn more with our four simple steps.
Illinois Lending is not just a loan provider—we’re a better way to borrow. Find out about our flexible loans so you can skip the payday loan, today!