It’s no secret that high-interest debt weighs on the budget of many Americans. In fact, according to LendingTree, American credit card debt now totals over $1.1 trillion. High-interest debt, such as credit card debt, as well as some auto loans, private student loans and more can make staying on top of your finances difficult.
Thankfully, there are options to gain the upper hand on that pesky debt. Debt consolidation with a personal loan is one of them. Discover how personal loan debt consolidation works and why you should consider it to help pay off high-interest debt.
A personal loan is a type of unsecured loan that can be used for a variety of purposes. “Unsecured” simply means that no collateral is needed to take out the loan. This contrasts with loans such as an auto loan or mortgage, where the vehicle or house is used as collateral if you are unable to pay back the loan.
Additionally, unlike many other types of loans which have a designated purpose, personal loans can be used for a wide variety of reasons. While many financial institutions may ask on the loan application what you plan on using your personal loan for, there are many acceptable uses. For example, besides debt consolidation, many people use personal loans to fund home repairs or improvement projects, to pay emergency expenses and more. However, there are some expenses that you usually can’t use a personal loan for, such as gambling, college tuition and a down-payment for a house.
Most personal loans are also fixed-rate, meaning the annual percentage rate (APR) you receive when taking out the loan is what you’ll pay for the entire duration of the loan. This makes paying a personal loan back simple, as you know in advance exactly what you’ll have to pay monthly.
Debt consolidation is a financial strategy that helps you combine high-interest debt into one lower payment. For example, if you’re paying interest on multiple credit cards (which typically have a higher interest rate), you can consolidate those payments into one lower monthly payment using a debt consolidation method.
There are several benefits to debt consolidation. The largest being you can save a significant amount of money. If the debt you’re consolidating has a lower interest rate than your initial debt payments, the new consolidated payment will total less than what you were paying before.
The second benefit is that combining your high-interest debt payments into one consolidated payment makes keeping track of your debt and how much you owe a much simpler process. Finally, many debt consolidation methods utilize a fixed-interest rate, including most personal loans, meaning you’ll know exactly what you owe each month.
There are several reasons why personal loans are a great option for debt consolidation. As mentioned, personal loans are typically fixed-rate, so you won’t have to worry about your monthly payment going up out of nowhere.
Additionally, personal loans tend to have significantly lower interest rates than sources of debt like credit cards. Because of this, consolidating your high-interest debt into a personal loan can result in significant savings every month. Of course, you’ll still have to pay off the personal loan, but your monthly personal loan payment will be far lower than the payments needed to pay your high-interest debt off.
When choosing your personal loan terms, you have flexibility in choosing what term works best for you. A shorter term (length of the loan) will typically result in a lower APR. You’ll pay less in interest this way, but your monthly payments will be higher. Conversely, a longer term will likely have a higher APR, but the monthly payments will be more manageable. The right answer will depend on your personal situation—decide what’s in your budget to pay every month and how aggressively you want to tackle your debt and decide from there.
While personal loans are a great way to consolidate debt, there are a couple considerations to think about before applying for one. One is that you will be expected to pay your personal loan back in a fixed increment every month. Unlike a credit card minimum payment, which are often a low percentage of the amount you owe, personal loan payments can be more significant. For example, if you take out a $5,000 personal loan for 12 months, you will be expected to pay that amount back, plus interest, within those 12 months.
Personal loans also aren’t the only debt consolidation option out there, and the best option for you will depend on personal circumstances. For example, home equity lines of credit (HELOCs) and credit card balance transfer offers are also common debt consolidation methods.
If you’re working to pay off high-interest debt, consider using a personal loan to consolidate your debt. Lowering the amount of interest you have to pay on your debt is a great way to save money and work towards your financial goals faster. The fixed, low rate and flexible terms many personal loans offer makes them a great choice for debt consolidation.
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