Paying off debt can feel overwhelming, especially when you have many different kinds of debt hanging over you. If you want to streamline the process, consider getting a personal loan for debt consolidation.
Managing all of your outstanding debt, with multiple due dates, interest rates and minimum amounts due, is a lot to keep track of. Missing one payment can cause your credit score to drop and hurt your chances of borrowing money in the future.
That’s why rolling all of your monthly bills into a single payment with a new debt consolidation loan can be a good way to simplify your financial life, keep your credit strong and make it easier to repay what you owe each month. Of course, you should continue to pay all your bills on time until you’ve simplified the payment setup with your new loan.
What is a personal loan for debt consolidation?
Debt consolidation with a personal loan is when you use a personal loan to pay off all of your credit cards, loans and other outstanding debt and then make one manageable payment towards your personal loan until it’s paid off.
If you have many different types of debt, a personal loan can help you keep them current. Falling behind on any of your payments, whether a credit card or student loan, can crush your credit score. It could also hinder your chances of borrowing money in the future.
When should you get a personal loan for debt consolidation?
Having high-interest debt, like credit card debt, might make you a good candidate for a debt consolidation loan. Personal loans tend to have credit cards. You might be a good candidate for a personal loan if:
- You have strong credit: The better your credit, the more likely you are to qualify for a loan at the lowest interest rate available. The lower your interest rate, the less you have to pay on top of the money you borrow.
- You have significant — but controlled — debt: If the amount of your debt is large, but you’re able to make at least minimum monthly payments, a personal loan might work best for you.
- Your spending is in check: A personal loan won’t help if you don’t have a handle on your spending, however. In fact, it could put you in even more debt. Before you get a personal loan, review your finances to make sure you can afford to take on the loan and pay off your outstanding debt.
If you don’t have great credit, you can still qualify for a personal loan but might face higher interest rates. If you face higher interest rates with a personal loan compared with what you’re paying now, skip it or wait until you qualify for lower interest rates. In the meantime, try alternative methods for tackling your debt.
Other ways to consolidate debt
If a personal loan consolidation won’t work for you, there are a few different ways to consolidate debt, including:
Home equity loan
If you own your home and owe less on your mortgage than the house is worth, you can take out a home equity loan and use it to pay off your outstanding debt. A home equity loan is a type of second mortgage that allows you to borrow against your home’s equity. You can use the lump sum you receive from your home equity loan to pay off all your outstanding debt and then make one monthly payment to pay off the new loan.
For home equity loans, your home is considered collateral. As a result, the lender views your loan as less risky, which means interest rates are typically lower compared to so-called unsecured loans, like personal loans. But keep in mind that if you fall behind or fail to make payments on your home equity loan, you could lose your home. Calculate your home’s equity to see if you’d qualify to borrow enough to cover your outstanding debt.
Balance transfer credit cards
If you have a few different outstanding credit card balances you want to manage, you could try a balance transfer credit card. Many cards offer 0 percent interest for a set amount of time, usually ranging from 12 to 21 months.
This is a good way to move all your outstanding credit card debt into one manageable payment each month. Keep in mind that if you have a lot of credit card debt, you might not get approved for a balance transfer that’s the full amount you need to move over. That means you could be paying off your new card balance as well as any cards that couldn’t get moved over.
Debt management plan
If you don’t qualify for a new loan or credit card transfer, you might have to manage your debt in a different way. If you haven’t done so already, start by organizing all your outstanding debt on a spreadsheet. Write out every lender you owe money to, your current interest rate, how much you owe and your monthly due date. From there, you can try a couple different debt management plans:
- Debt snowball: This method lets you focus on paying off your smallest debt first. While making minimum payments on every debt you have, you would put all your extra cash towards the debt with the lowest balance. Once that’s paid off, you’d then focus on putting all your extra money towards the next-lowest balance. Do this until all your debt is paid in full. The upside is that you’ll see results fast. The downside is that you might end up paying more in interest on other debt that charge higher rates.
- Debt avalanche: This method focuses on paying off the debt with the highest interest first. You’d make minimum payments on all your debt obligations, and then put all your extra cash towards the debt with the highest interest payments. Do this until the debt is paid off, and then move onto the next-highest interest rate debt until all your debt is paid in full. While you might save more by paying higher-interest debt, you might not see results as fast as you would with the debt snowball method.
A personal loan could be a great way to consolidate your debt. But it’s not necessarily the right method for everyone. Review your individual debt situation and see if a personal loan would work best. Otherwise, try different methods, like a balance transfer, home equity loan or debt management plan to get a handle on your debt.