Making payments to multiple lenders every month can be irksome. It can also be a costly affair if some of your debts carry a high-interest rate. Taking out a personal loan to consolidate all your debts can make debt repayment easier and at times, cheaper, as the new loan may have a lower interest rate than the combined rates on all your current debts.
You can use a personal loan for anything, but it makes sense to use it to repay all your existing debt. The interest rate on your personal loan will be based on your credit score, income, and other financial information. Most personal loans are unsecured, meaning you don’t have to provide any collateral to the lender. Here are some of the pros and cons of getting a personal loan to repay your debt.
Pros of Debt Consolidation with A Personal Loan
You could lower your interest rate: Personal loans may have lower rates of interest than other loans. If you qualify for a low-interest personal loan and use it to consolidate your debt, you can save a lot of money on loan repayment.
Fixed monthly payments: If you can get a low-interest fixed-rate consolidation loan, your monthly payment will remain the same throughout the loan term and you will not have to worry about interest rates going up periodically.
Fixed repayment term: When you take a personal loan, you will know your loan term and when you can be debt-free if you repay on time every month.
Boosts your credit rating: Consolidating your debt with a personal loan could help your credit score if it leads to a lower credit utilization rate and more on-time payments.
Cons of Debt Consolidation with A Personal Loan
You may pay a higher rate: You cannot always be sure that a personal loan will definitely have a lower interest rate than that of all your existing debts. If you consolidate any debt that has a lower interest rate than that of your personal loan, you will actually be raising the cost of repaying that loan.
Personal loan charges: Sometimes you have to pay charges such as application fees, origination fees, etc., to take out a personal loan. All these fees put together may sometimes make consolidating your debt quite expensive.
