Getting A Personal Loan to Consolidate Debt to a Lower Interest
If you are like most people, you have some kind of debt. Maybe you have only a little bit of debt that is good for you, like a mortgage. Unfortunately, the reality is that many people have a lot of debt. According to Forbes, 40 million households are house poor, meaning they have a house they cannot afford.
Many more than that are in so much debt, it would take them over ten years to get out of it. As a result, we have resigned ourselves to being in debt and constantly putting ourselves further into debt. It does not have to be like that. There is a better way. Continue reading to find out how to consolidate debt to a lower interest. This could be the start of a debt-free life. Wouldn’t that feel like a huge relief?
Debt Consolidation With Low-Interest Personal Loan
I never want to assume that people fully understand their finances. The more people I talk to, the more it seems that people often just let things happen when it comes to their money. They open credit cards and accumulate debt without ever understanding how it works. They apply for loans without ever reading the fine print. I want to change that. I want everyone to take control of their finances and understand the decisions they are making. Let us start here with basic information about personal loans.
What Is A Personal Loan?
A personal loan is when you borrow money from a lender with the promise to pay it back in regular monthly payments. That lender can be a bank, a credit union, a personal loan finance company, or even a friend. You borrow a set amount of money at interest. That interest rate depends mainly on your credit score and from whom you borrow the money.
You agree to pay back the money within a set amount of time, usually three to five years. As long as you make your payments each month on time for the specified time, everyone is happy. If you miss a payment or make late payments, your credit could be negatively impacted. Personal loans can be a great tool to get control of your finances if used properly. You can use a personal loan to consolidate debt to a lower interest.
Can I Use A Personal Loan To Consolidate Debt?
Yes, absolutely, you can get a personal loan to consolidate debt to a lower interest rate. That is really the ideal scenario when it comes to debt consolidation. What you are hoping to achieve is lower interest, with one monthly payment from you to pay off all of your debts. You can choose any loan places you wish for a personal loan. You can even choose to find unsecured personal loans online to pay off your debt. The key is to get a loan that pays off all of your debts.
This way you focus on making one payment per month to decrease your debt. If you have extra money each month, you can make extra payments to pay off the loan faster. When you are focused on one payment, this is much easier to do. One thing I want to caution you about is when you have consolidated your debt and making only one payment that you do not get yourself back into debt. Making a plan for yourself to pay the monthly payment is the best course of action. When you have a plan, you are in control.
Is A Personal Loan A Good Idea?
This is really a question you must answer for yourself. It could be a good idea to consolidate debt to a lower interest, if you can afford to. Remember when you borrow the money, you have to pay it back. If you cannot afford to pay it back, you should not borrow the money. You need to take a long look at your budget and decide how much you really can afford to pay per month.
Do not get yourself into a situation where you cannot afford to pay back the loan. This only makes your financial picture much bleaker. By attempting to consolidate debt to a lower interest, that should free up money for you that you can use to pay back the personal loan.
You can always count on Loanry to connect you with reputable lenders and may even make the entire process a bit easier for you. Our partner Fiona may be able to offer you some options depending on the information you put in below. See if you qualify for a loan with any of the lenders:
How Can I Use A Personal Loan?
You can use a personal loan for anything that you want. A lender may ask you what your intention is for the loan, but that rarely is a determining factor. Once you have the money in your bank account, it is your to do with what you want. However, I would recommend that if your intention was to pay off debt, then you should pay off debt. Do not play with the money. Do not think you can gamble it and double your earnings. That rarely ever works out well. It is not worth the risk.
Can A Personal Loan Improve My Credit?
The short answer is yes, a personal loan can improve your credit. When you consolidate debt to a lower interest, you are paying off all of those other debts at one time and focusing on just one loan. This allows you to make your payments on time. This prevents you from missing payments. All of these things can help improve your credit. The biggest reason for bad credit is missed or late payments. When you are making only one payment, it should be easy to make sure you pay it on time.
Often times, when you take out a personal loan, even when the interest is high, it is still lower than credit card interest. Credit cards often get people into a bind. It is easy just to use them and not pay attention to how much you are spending. But, you always have to pay for it. When you get that bill and you cannot pay it in full, you have interest (or finance) charges.
When this happens month after month, those finance charges just pile up. So, when all you are able to pay is the minimum payment and the interest charges each month are more than the minimum payment, you are in a world of hurt. This is when a personal loan can help you. You can consolidate all of the credit card debt into one static monthly payment. Just remember, do not continue to use your credit cards.
What Is A Debt Settlement?
I want to shift gears slightly to talk about debt settlement. Many times when you owe money to a creditor, they may be willing to negotiate a lower debt. You can contact any of your creditors at any time and ask if there are willing to make a settlement. When you negotiate a lower debt, both you and the creditor are agreeing to the terms. Sometimes, the creditor allows you to pay a certain percent of the debt across a certain number of payment.
So, you may be able to pay 70 percent of the debt in 8 months. Another potential settlement is paying a one-time lump sum amount to satisfy the debt. It might be 25 percent or 50 percent, but the creditor sees one lump sum payment now is worth more than however long it might take you to pay the debt in full. This could be an alternative to consolidate debt to a lower interest.
That sounds great, doesn’t it? Well, there is a catch. You have to keep in mind while this negotiating is happening and you are only making partial payments, you are not paying off the full debt. That has the potential to negatively impact your credit. Once the debt is paid, your credit should recover a little. If you already have bad credit, it may not be a real impact. Once it is low, there is not much further for it to go down. Your credit may have a positive impact on paying off the debt. This may be a good option for someone with poor credit.
What Should I Really Know About Debt Consolidation?
While the advantages to consolidate debt to a lower interest may seem fairly clear, let us focus on some of the disadvantages. Disadvantages to debt consolidation can include high-interest rates. Most of the people interested in debt consolidation have poor credit and high debt.
As a result, they may face height interest on their consolidation which makes their monthly payment higher. It could make it higher than they are currently paying.
However, it is important to note that most likely, only the minimum payment is made and that gets you no closer to being debt-free. So you made need a larger monthly payment to reach your desired result. The amount of time it takes to pay off the consolidated loan may be longer than you think. The higher your amount of debt, the longer it will take.
It does not take much time at all to get into a debt problem. It often takes consistent and long work (repayment) to get out of it. Your best bet is to talk to a financial advisor to get educated advice on how to proceed. You really need to understand how that monthly payment impacts you. If you cannot afford it, you are not helping yourself at all.
What Types Of Debt Can I Consolidate?
You can consolidate debt to a lower interest in the way that you want. You can choose to consolidate any debt that you wish. If you are going to consolidate some debt, you should try to consolidate all of it. You can put yourself in a bad spot financially by consolidating only some of it. You should take a look at all the money you owe and get the payoff amount. The payoff amount may not be what you think, so you should contact your debtors to verify the amount.
Gather all those amounts so you can get an accurate idea of how much money you need to borrow in a loan. When you look for a consolidation loan, you can find one that is for the exact amount that you need. This can give you a clear picture of your interest rate and monthly payment before you even apply for the loan.
This is helpful information for you when making these types of decisions. I mentioned this before, but it is important enough to repeat. Attempting to consolidate only some of your debt may not be a good idea. This could put you in a worse place financially. You still have to pay the individual debts that you did not consolidate in addition to the payment for the consolidated debt.
Why Do I Want A Lower Interest Rate?
Personal Loan interest rates can make a huge difference to your monthly payment. One thing to understand is your credit score directly impacts your interest rate. The better your credit score, the lower interest rate you can receive. And let’s be real, you want to consolidate debt to a lower interest rate. If you do not get a lower rate, then what is the point.
That being said, it is important to really understand interest rates. Forbes magazine shares an enormous amount of information about interest rates. You should learn as much about them as you can. It will be beneficial to you in the long run, if you can gain a better understanding of the interest rates.
What you need to know right now is how those interest rates impact the bottom line for you. That translates to the amount of money you pay for your loan. Interest is what the lender charges you to borrow money from them. This is how they make money. Let me show you an example to make it easier to understand.
Let’s just say you are trying to consolidate $20,000 worth of debt. You have a fairly good credit score, so you find a loan with 10 percent interest. That means the total interest you pay is 2,000. Your total loan amount is $22,000. If you are paying back your loan in 36 months, that means your monthly payment is $611.11. That might be a little high for you, so you choose to pay it off in 60 months instead. That changes your loan payment to $366.67.
Now, let’s take a look at that same scenario with bad credit. Since you have bad credit, your interest rate is 25 percent. You are borrowing$22,000 at 25 percent interest. That means your total interest is $5,000. Now, you are borrowing $25,000. For a loan of 36 months, you are looking at a monthly payment of $694.44. For a loan at 60 months, that payment would be $416.67.
The only difference between those payment amounts is your interest. It is best for you to shop around and find a loan with the best interest rate. It will save you money.
Should I Get A Personal Loan Vs Debt Settlement?
There is no one clear answer for everyone here. It really depends on your situation. A personal loan is a great way to consolidate debt to a lower interest. If you have poor credit, it might be hard for you to find a lender that allows you to borrow the amount of money you need. Then you find yourself borrowing some of the money you need and only paying off half of your debt. This probably does not put you in a better position. If you find a lender that gives you the money you need, the interest rate may be through the roof and come with a ridiculously high payment.
Debt settlement has some advantages. If you can get your creditors to agree to a settlement amount and you can pay a portion of your debt, it could be a win-win. The settlement might have the debt removed from your credit record sooner and improve your credit. Keep in mind, a debt settlement may come with fees. Often times to settle a debt, you work with a debt settlement company. These companies charge fees to handle this for you.
They negotiate everything with the creditor and handle all the paperwork, but you could pay a hefty fee for it. If they are not able to negotiate a fair settlement, it may not be worth it to you to pursue. You do not have to use a debt settlement company. You can work directly with the creditors.
There may be a clear choice for you. If there is, go with that. But, there may not be one. Maybe either situation is not appealing to you. Or, maybe they both have benefits. In that case, pick the one that works the best for your situation now. No matter what you choose, do not continue to spend money that you do not have. Getting yourself out from under a ton of debt is a great idea, but learn the lesson and do not go there again.
Should I Just File For Bankruptcy?
Do you remember the days when it seemed like everyone was filing for bankruptcy? The reason for that is because it used to be easy to do. You could file Chapter 7 bankruptcy, which eliminated all of your debt that a process of liquidating assets and getting rid of everything. Just like that, the debt was gone. It was a black mark on your credit report. You were told seven years, but really, you could start building credit in about a year. By the time you got to the seven-year mark, you were in fairly good shape, providing during those seven years, you worked on building up your credit.
Things have changed a lot over the years and Chapter 7 is not so simple or easy. First, you have to go through a process of debt settlement, but this time with the words bankruptcy on your credit report. That black mark is like a hole burned into your report. It is incredibly difficult to bounce back. Now, not all debts are resolved with bankruptcy.
There are items that fall outside of it. So, after going through all the headaches, and having a black mark, you still owe money to someone. Bankruptcy is far-reaching now. It can prevent you from getting insurance, and even a job. It honestly is not worth it today. There are much better ways to consolidate debt to a lower interest. Even when you feel like you have no other options, dig a little deeper and look a little more. There has to be something better than bankruptcy.
What If I Have Bad Credit?
Maybe you know your credit score already. If you do not, find out what it is. If you do not know it, you cannot do anything to improve it. You should always be working to improve or maintain a high credit score. Those three numbers are the difference between getting a loan, or not. They are also the difference in how much money you pay in interest. Sometimes, a bad credit score can prevent you from getting a job. It is that serious and you should take control of it.
You may realize by now that having bad credit can be a vicious little cycle. You have bad credit and high debt, but you cannot pay off the debt because all you end up paying is the minimum balance. It would be in your best interest to consolidate debt to a lower interest, but you are having a hard time getting a loan because of your bad credit. What do you do?
The truth is that it takes hard, consistent work to increase your credit score. It is possible, but it is not easy. You could consider a debt consolidation service for bad credit to help you get control of all of your debts. There are some benefits to this plan. You are letting a company handle your debts for you.
They take over and negotiate with your creditors and get all of your debt combined into one payment for you. You are able to focus on making that one payment. This is typically lower than all the other minimum payments you were making. If you stay on track and do not acquire any new debt, you can usually be debt-free in just a few years. There are some downsides to consider, too.
There are certainly smart ways to use a personal loan, like to consolidate debt to a lower interest and pay off all of your bills. You can also use a personal loan to help increase your credit score. When you make payments on time and work towards paying off the debt, this increases your credit score. There are also some really bad ways to use a personal loan.
If you currently are swimming in debt, it is not a good idea to take out a personal loan to go on vacation, or to buy a new TV for your house. You are only compounding your current problem and most likely making it worse. It is never too late to take control of your debt. You may feel like you are drowning, but there are ways to swim. You have to be smart about your financial decisions.
I talked a lot about needing to consolidate debt to a lower interest. That is always a good move when you have a lot of high-interest debts that you cannot seem to get a handle on paying. There is one thing that you really must consider when looking to consolidate debt to a lower interest. You must be able to make the payments.
You should never enter into a loan agreement that you do not understand and always know what the fine print says. Make sure you always understand how much you have to pay and when. Plus, you should be aware of all fees. If there is something you do not understand, ask. Do not sign anything until you completely understand all of it.
Do not get yourself into something you cannot escape. Make sure you can afford the loan. There is nothing worse than taking out a loan you cannot afford to pay. If you feel confident that you are making the right choice and you understand all the information and you can pay back the loan, then proceed. Then you can begin to feel the freedom of being debt-free.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.