Should You Take a Personal Loan to Pay Off Debt?
As the name suggests, debt consolidation allows you to combine multiple debts or credit card balances into a single loan. This combined debt comes with more favorable terms and, more often than not, a better interest rate. But before you decide to take a personal loan to pay off debt, you have to be aware of the advantages and disadvantages of doing so. It will help make or break your journey to building a better credit score and living debt-free.
Benefits of Consolidating Your Debt
Pay Off Debt Sooner
One of the primary reasons people decide to consolidate smaller financial liabilities into a single, larger debt is to get better terms and lower rates. These conditions, in theory, make clearing debts easier.
Improve Your Credit Score
Many financial institutions argue that taking a single loan at a low-interest rate to pay off smaller high-interest debts is the best way to rebuild your credit score. With lower rates and favorable terms, making a single payment per month for a consolidation loan on time will help you clear your debt and build good credit.
Convenience
When you combine several small debts into a single, larger one, you will no longer be bogged down by multiple due dates every month. This arrangement makes it less likely for you to miss a payment date.
Cons of Combining Your Financial Liabilities
While it sounds good on paper, consolidating your debt has some caveats you should be aware of. Otherwise, you may get a ding on your credit score.
Hard Hit on Your Credit Score
While consolidating your debt can improve your credit score, you may have to go through a hard credit inquiry in the long run. This will cause your credit score to dip temporarily, so it’s essential to plan before pushing through with consolidation.
Late Payments Leave a Negative Impact on Your Score
Consolidation, when done right, can rebuild your credit score. However, if you are not diligent in making on-time payments, this process will do the opposite. Any late payments will still leave a negative impact on your credit score.
Potentially Increased Rate on Federal Student Loans
You can lower your monthly payments for high-interest private student loans by refinancing them into a single loan. On the other hand, consolidating federal student loans into a private loan can lead to you losing some special benefits offered by the government. As such, if you are not careful, you may face higher interest rates.
Key Takeaways
When you consolidate your debt, you can improve your credit score by making payments on time, every time. If done diligently, this process can be the fastest way for you to start living debt-free. Consider the pros and cons of consolidation, and decide if you are ready to commit to making a single monthly payment for all of your debts. Use our debt management calculator and see how much money you could save!