Debt Consolidation Loans vs. Personal Loans
When you want to borrow money to handle your financial needs, you will find yourself faced with numerous options.
While there’s often no question of whether an auto loan, student loan or home loan is the right type of loan for you, there are some types of loans that aren’t so cut and dry.
The lines are sometimes blurred between whether a debt consolidation loan or a personal loan will best provide you with the financing you need. While personal loans can be used for a variety of reasons when you need extra cash, such as funding a vacation or buying a new couch, if you need to consolidate your debt, a debt consolidation loan is the best route to take.
Why Consider Debt Consolidation?
With so many bills to pay each month, it’s easy to let one slip by, and when that happens, you’re hit with a late fee or an increased interest rate. Or, maybe your current interest rates are high, and you’re looking to get a lower rate.
Debt consolidation means that you are paying off all or some of your debt with one new loan. That way, instead of making five payments each month to different companies to pay off your debt, you make only one payment each month, to only one creditor.
To qualify for a debt consolidation loan, lenders want to know that you can afford to make the payments. They want to see that you’re financially stable and have a history of making payments on time. However, unlike at other banks and credit unions, debt consolidation loans at San Francisco Federal Credit Union are unsecured, meaning there’s no need for collateral.
If you are thinking about a debt consolidation loan, your interest rate, the length of the loan, and associated fees are the most important terms to consider. While you want to consolidate your loan for convenience, you don’t want to put yourself in a worse financial situation by agreeing to terms that don’t benefit you.
Start by comparing your current interest rates to the interest rates offered for the loan. If you can, get a loan with a lower interest rate, which will allow you to save money over the length of your loan.
Next, look at the monthly payment. Paying less each money is excellent; however, you also want to look at the length of the loan. If you pay back $5,000 over 84 months instead of 60 months, you’ll be paying less each month, but you’ll end up paying more in interest.
These are just some of the benefits of getting a debt consolidation loan:
Make a single monthly payment
As mentioned, you make a single monthly payment for your debt instead of paying multiple creditors, which makes it easier to keep track of your expenses.
Decrease your monthly payment
Often when you consolidate your debt, you’ll find yourself paying less money each month. This gives you more wiggle room in your budget or allows you to pay down your debt quicker by putting more towards the principal balance.
Pay less interest
Another primary benefit of consolidating your debt is that, many times, you can secure a new loan with a lower interest rate. If you’re paying less in interest for your debt, you could possibly save hundreds or thousands of dollars over your loan term compared to if you didn’t consolidate.
Increase your available credit
If your debt is primarily derived from credit cards, once those balances are paid off, you will have more available credit, which will boost your credit score since your utilization rate decreases. This is only beneficial to you if you don’t rack up more debt, so be sure to have a plan in place to keep yourself from accumulating more debt.
Choosing Debt Consolidation Loans vs. Personal Loans
You might find that with a debt consolidation loan, interest rates are lower than your current credit card. However, interest rates will likely be higher than other loan options, such as a personal loan.
Personal loans are great if you need additional cash flow for specific items, life events or bills. For example, if you need to repair your vehicle, purchase a large household item, pay for a wedding or loan money to a relative, you can take out a personal loan. These loans are unsecured, meaning there’s no need for collateral.
However, while you might be tempted to consolidate your debt with a personal loan, that isn’t the best route to take. Debt consolidation loans are specifically designed to help you pay off a lump sum of debt, whereas personal loans are for when you need cash for a variety of reasons.
If you’re considering debt consolidation, you want to be sure that it’s the right choice and that you select the best loan for your financial situation. Remember, debt consolidation loans are great for doing what their name implies, consolidating debt. Choose a personal loan only if you have cash flow needs.
This isn’t a step that should be taken lightly, so take your time doing the required research before making a final decision.