Personal loans can help you consolidate your own higher-interest rate debt, and many can be found through your current bank provider or credit card issuer. Assuming you're approved for a personal loan you intend to use to consolidate debt, you'd tap into the personal loan to pay off existing debts. Then, you'd make one monthly payment to your personal loan issuer in the agreed-upon amount until the loan is repaid in full.
Simple as that process may sound, however, it’s important to determine what the personal loan costs compared to what you’re currently paying on your debt and some other factors before you assume a personal loan will help you manage your debt more effectively.
If you can answer “yes” to these five factors, taking out a personal loan to consolidate your higher interest rate debt could work to your financial advantage.
You Have Decent Credit
You have more than one credit score and the ranges for each differ slightly—but generally speaking, Experian says credit scores with a 300-850 range are considered “good” when the credit score is 700 or above. The higher your credit score, the more options you may have when it comes to finding a personal loan at competitive rates and terms.
You Have a Handle on Your Spending
Before you consider using a personal loan as a way to consolidate your debt, make sure you can make all of the monthly payments in full that the personal loan requires—for the duration of the loan. Unlike a monthly credit card bill, which may allow you to pay only a fraction of what you owe each month, most personal loans require that you make monthly payments in a predetermined amount. In addition, it’s important that you don’t accumulate more debt on your credit cards while you’re trying to pay down existing debt with the personal loan. (Otherwise, you may not see significant cost-savings from debt consolidation).
You Have Deposit Accounts with the Bank or Credit Union Offering the Loan
Personal loans can be found through third parties and financial institutions, but you may find a more competitive loan rate and terms if you borrow from the same provider you use for your checking or savings accounts. Fifth Third customers are eligible to borrow through its Signature Loan and Secured Loan products, for example.
Your Credit Card Interest Rates are Higher than the Personal Loan
Debt consolidation with a personal loan may make the most financial sense when it empowers you to borrow for an interest rate that’s lower than what you currently pay on the debt you consolidate. The interest rate on personal loans varies based on the loan issuer, your credit score, credit history, and other factors like your current debt, income and other assets.
Personal Loan Amounts Align with the Amount of Debt You Want to Consolidate
The amount of money you can borrow through a personal loan varies based on the loan issuer, so find a lender whose personal loan amounts align with the amount of debt you plan to consolidate.
Using a personal loan to consolidate debt can make it easier to manage debt, and could help you pay what you own more quickly, and for less money than you'd pay with multiple balances on several credit cards. Follow these simple tips to search for a personal loan that supports your financial goals, and you could have a better handle on your debt in a few short months.