Debt Consolidation Versus Personal Loan

Debt consolidation and personal loans are not mutually exclusive from one another. In fact, it is not uncommon for consumers to use personal loans to combine high-interest debts and lower their monthly payments. If you are in over your head with debt, and if you want to streamline your payments, you may have questions about debt consolidation and, more to the point, about using personal loans to pay down outstanding financial obligations. We have answers.

What Is Debt Consolidation, and How Does It Work?

Debt consolidation involves combining multiple debts from high-interest loans, credit cards and other obligations into one monthly payment. There are several ways to consolidate debt, including balance transfer, home equity loans and personal loans. When you use a personal loan to consolidate your monthly obligations, you would use the funds from the loan to pay off every debt in its entirety. Then, instead of making payments to multiple lenders on various due dates, you would make one monthly payment to the bank or credit union from which you borrowed.

Why Is Debt Consolidation Helpful?

Using a personal loan to consolidate debt comes with many perks. For one, personal loans typically feature far lower interest rates than revolving debt such as credit cards and department store cards, or high-interest loans such as auto loans or payday advances. Two, instead of having to pay interest on multiple loans, you would only have to pay it on one. These benefits alone equate to cost savings. Three, because of the money you save on interest, debt consolidation via a personal loan can help you pay down your debt faster, especially if you commit to using the savings to make greater monthly payments.

Finally, debt consolidation can also help you lower the amount you pay toward your debt on a monthly basis. While you should pay as much as you can each month, using a personal loan gives you peace of mind that if you cannot put forth a substantial amount each month, you don’t have to.

Are Debt Consolidation Loans Bad for Your Credit?

Like with any form of credit, whether or not a debt consolidation loan is bad for your credit all boils down to how you use it. Initially, a personal loan can boost your score by reducing your credit utilization ratio. However, if you don’t alter your spending habits and continue to charge expenses to your now balance-free credit cards, a loan can just worsen your debt situation. If you put your credit cards away, make timely payments towards the loan and commit to not accumulating more debt, a debt consolidation loan can serve as a great way to boost your score.

Can Debt Consolidation Help With Payday Loans?

Though payday loans seem like a quick and easy solution for those who need fast cash, they often trap consumers into a vicious cycle of having to repeatedly pay sky-high fees to renew the same loan. According to one study, the average payday loan recipient was in debt for five months and paid $520 in fees just to borrow $325. If you’re all too familiar with the payday loan trap, you may wonder if you can use a personal loan to pay off your debt. The good news is you can!

By consolidating your payday loan debt into a single personal loan, you enjoy the same benefits described above: lower interest rates, predictable monthly payments and flexible repayment terms.

How Much Does Debt Consolidation Cost?

How much you will end up paying for debt consolidation all depends on how much you need to borrow, what method of consolidation you choose to use and the lender’s fees. For instance, the interest rates on personal loans vary greatly and can be as low as 5% to as high as 36%. Your credit score dictates the rates for which you qualify.

If you consolidate through a balance transfer, you may be able to transfer balances on one or several high-interest cards to one card with a low-interest rate. Some balance transfer cards even feature 0% interest for the first nine to 21 months. However, many cards charge transfer fees, which could be as much as $300.

Consolidation through credit counseling is inexpensive and will cost you a low monthly management fee. That fee ranges from $25 to $35, on average.

Where Can I Apply for Debt Consolidation in Ontario?

Shopping around for a personal loan that offers the best rates and terms can be time consuming and a headache. LoanConnect takes the hassle out of the search by instantly connecting you with lenders within our network. All you have to do is input your information, including the basics (name, number and address), your financial details (employment status, housing status, annual income and other expenses), your credit score and the amount you need to borrow. From there, we will search our network and connect you with the offers that will best suit your needs. When you’re ready to tackle your debt the easy way, use our online application.