The right personal loan could make your debt much cheaper and easier to pay off.
- Personal loans allow you to borrow money for almost any reason.
- They often come with affordable interest rates.
Personal loans can be used to consolidate debts. This means that you take out a new personal loan and use it to pay off several existing creditors. You can use a personal loan to pay off credit cards, medical debts, other personal loans, etc.
But why would you want to do that? Here are six main reasons why a personal loan can be the ideal tool to use to consolidate your debts.
1. You can use the loan proceeds for anything you want
Most personal loan providers offer great flexibility in how the borrowed money is used. They may not even ask you what you will do with the loan proceeds.
Therefore, after borrowing, you are free to pay off just about 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 much lower than the rates for other common types of debt, such as credit card debt.
If you can lower the interest rate on your borrowed funds, repayment should be less expensive over time because you won’t have to give the lender so much money to have the privilege of accessing credit.
3. Many personal loans allow you to borrow a large sum
It is often possible to borrow a large sum 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 your personal loan proceeds 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 pay off with your consolidation loan, and you won’t end up with multiple creditors when you’ve completed the process.
4. You can lock in your interest rate with a personal loan
Many lenders offer you the option of choosing a fixed rate personal loan. If you refinance variable rate debt into a fixed rate loan, you won’t have to worry about rising rates and your debt going up.
You’ll have complete certainty about what you’ll be paying each month because your monthly payments and borrowing costs will never change.
5. Personal loans come with fixed repayment schedules
When you apply for a personal loan, you decide on a fixed term for the repayment of your personal loan, for example three years or five years. This time frame will not change once you sign your loan agreement and commit to borrowing.
As a result, you’ll know exactly when you’ll complete your debt repayment plan and be free of any debts you’ve consolidated.
6. You don’t usually put your assets at risk when you take out a personal loan
Typically, you will use an unsecured personal loan when consolidating debt. This means you don’t need to use any assets as collateral, unlike a home equity loan, where your home secures the loan.
Each of these benefits distinguishes personal loans from other debt consolidation options, such as home equity loans or balance transfers. If you’re hoping to consolidate your debt this year, a personal loan should be considered when deciding what new credit to take out to pay off your existing lenders.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.