Should you consider a personal loan to pay off your debt?

If you are carrying multiple high-interest debts, then you may think of using a low-interest personal loan to pay off debt through one manageable monthly payment. It might be a wise and easy way to reduce the amount of interest you’re going to pay every month, as well as wiping your debt faster.


Yes, you also have to pay interest on your new personal loan. However, if you can negotiate with the creditor and get a low-interest personal loan, then your overall interest payment on that single monthly payment will be much lower than your existing multiple debt interest combined.


Choosing a personal loan to consolidate high-interest debts may sound easy, but you shouldn’t take it lightly.


Remember, you’ll be paying off all your debts with a new loan and your interest rate will be reduced, but the overall debt amount remains the same.


You have the option to consolidate all different debts using a personal loan. But you should first analyze whether or not it’s your ultimate option.


These are the two valid reasons why you should take out a personal loan to pay off debt:


a. It is cheaper


If you are dealing with high-interest debts such as credit card debt or payday loans, the interest rates payable will be quite high. Popular credit cards such as American Express, Discover, MasterCard, Visa, etc. have high-interest rates over 15%, even for consumers with a good credit score.


So, if you compare the interest rates of your debts with the interest rate of a personal loan, you’ll find that a personal loan is a cheaper option to choose. If you have a good credit score, the creditor/lender might offer you a better interest rate compared to the market rate.


b. It will improve your credit score


Personal loans are considered unsecured installment loans. They are different from revolving credit accounts such as credit cards. So, if you choose to borrow a personal loan, your credit score won’t be getting a negative impact in the same way as it would get when you have a credit card debt.


For example – if you are paying off credit card debt with a personal loan, your credit utilization ratio will be zero, and your credit score will increase to a good level. But to achieve that, you should make the monthly payments on your new personal loan on time.


How to pay off debt with a personal loan


If you have multiple unsecured debts, such as credit card debts, high-interest loans, overdrafts, and payday loans, paying off debt quickly will be easier through a single monthly payment. You may also manage your finances better and save a good amount from interest payments.


You can take out a personal loan and use it to pay off your existing high-interest debts. Once you pay off all the debts, you may start repaying your new loan in monthly installments, practically at a lower rate of interest.


This way you will be making one payment every month. As you will be taking out a low-interest personal loan, your monthly payment will also be lower than before. As a result, it will be easier for you to afford it. You may make higher payments towards the loan and pay it off faster.


But still, before taking out a personal loan to pay off debt, you must consider all the pros and cons and then decide if it suits your needs.


The pros and cons of taking out a personal loan to pay off debt


Check out the pros and cons of using a personal loan to consolidate debt. It’s quite crucial to consider them before making any decision.


Pros Cons
  • You have the option to make a single payment each month, to only one lender.
  • Paying off debt quickly is possible once you reduce your overall interest rate.
  • You can reduce the total interest rate you are currently carrying while paying off your multiple debts
  • You’ll have a fixed tenure to pay off the loan. This way, you will know the exact time when you will be debt-free.
  • The monthly installment of the personal loan is fixed. So, it will be easier for you to create a household budget.
  • Making on-time payments on your loan may help you to improve your credit score.
  • Few lenders may not approve your personal loan application. This is because they might not entertain your request to use a personal loan to pay off debt.
  • To pay off debt fast, you might have to bear a fee, as well as an early repayment charge.
  • Many lenders offer cheaper personal loan rates to borrowers who have excellent credit scores; so if your score isn’t up to the mark, you won’t be getting the best rate.
  • You’ll have a fixed tenure to pay off the loan. This way, you will know the exact time when you will be debt-free.
  • With a higher interest rate, sometimes you may end up paying more in monthly payments.
  • If you choose a longer period to pay off the loan, then you may also end up paying more.
  • If you miss your due date to pay the monthly installments, it can affect your credit score.

Things you must consider before applying for a personal loan


If you want to use a personal loan to pay off debt, you should analyze whether you can save a decent amount by doing this. For this, you may need to consider a few things:


1) Analyze your financial status


Before you get a personal loan, review your finances to make sure you can afford to pay off the loan and your other outstanding debts too.


2) Know your debt amount


You need to determine how much money you need to consolidate debt. You should add up the total amount of your existing debts, additional charges for prepayment, and other conditions for borrowing such a big amount.


3) Fix the loan term


You should determine the possible loan term in which you can repay the personal loan. Choosing a longer loan term would lower your monthly installments, but you might be paying more interest in the long tenure.


4) Look for additional charges


You need to confirm if there are any prepayment penalties or additional charges associated with the loan. This additional cost may impact your savings.


If you have a better credit score, it will be easier to get a competitive interest rate on a personal loan to pay off credit cards or other high-interest debts. The lower your interest rate, the more savings you can get.


Bottom line

A personal loan could be a great way to consolidate debt. But it’s not always the perfect option for every consumer. For a better assessment, you must review your debt situation and see if it is wise to use a personal loan to pay off debt. If this is not a suitable option for you, you may try other ways to pay off your debt fast.