Debt Consolidation Loan: What You Need to Know?

Debt consolidation programs are a way to combine a number of outstanding debts into a single loan with one monthly payment.

If you’re able to consolidate your debt into one loan with a lower overall interest rate, it may help you save on interest charges and pay off your debt faster. But consolidation doesn’t eliminate or forgive your debt.

It’s also important to keep in mind that even with a lower interest rate, you may end up paying more over time because debt-consolidation loans may have longer terms than those for the multiple debts you’re paying down now.

Pros and Cons of Debt Consolidation with Personal Loans

Pros of a Personal Loan

  • Reduce your credit utilization score to improve your credit score – your credit utilization score, or the ratio of your debt to your credit limit may impact your credit score. By paying off multiple debts through consolidation, you will improve your credit utilization score by using less of your available credit, and therefore possibly your credit score, more quickly.
  • Make your debt easier to manage – taking control of your situation and proactively making a plan to fix it gives you some peace of mind, not to mention reduces the stress of managing multiple payments with different due dates.
  • Cut your interest charges – the average individual has around four credit cards—with higher interest rates. Not to mention car payments, medical bills, mortgages, and student loans. By settling high-interest debts with a lower-interest loan, you can reduce the money you spend in the interest portions of your payments.
  • Debt settlement programs may hurt your credit score – the other option for debt relief and debt settlement programs, may sound appealing, but they can actually hurt your credit score if the debt is not paid in full or if you miss payments. There may also be costly fees associated with the service, and scams are prevalent everywhere you turn.

Cons of a Personal Loan

  • May entice you to put new debt on your zero balance credit cards – once you’ve cleared the debt on your credit cards to a zero balance, it can be tempting to charge more on them, which will increase your overall debt. This new debt could derail your attempts to get back on track. Some people cut up their credit cards to prevent this from happening
  • Not every debt consolidation offer improves your interest charges – make sure to move credit card debt from higher APR credit cards to lower APR debt consolidation loans or balance transfers. If the APR is not lower, you’ll end up increasing your interest charges, which defeats the purpose of debt consolidation to begin with
  • Debt counseling fees can add to your expenses – taking a debt consolidation loan will move your debt, but it often means meeting with a debt counseling agency to put together a strategy for tackling a variety of debt. Their services are offered on a monthly fee basis. This may provide a more comprehensive program to improve your financial status but also eat into your finances.

Read: What are the Pros and Cons of Debt Consolidation


Most Common Reasons Why People Turn to Personal Loans

There are many reasons to turn to personal loans. From paying off credit card debt to financing large purchases. Here are the common reasons why people turn to personal loans.

Paying Off Credit Card Debt 

While this is a better option than using a payday loan or a credit card, be sure to research other options and compare interest rates to ensure you are getting the best deal you can.  

Emergency Loans

Whether it’s the loss of a job, a totaled car, or trying to make ends meet during a worldwide pandemic, there are times when all of us need some extra cash. Depending on your emergency there may be other or better funding methods to assist with your emergency.

However, a personal loan is a much better option than something like a payday loan with high-interest rates that are difficult to pay back.   

Life Events

You want the big fancy white wedding but can’t cover the cost? Funding a fancy vacation but don’t want to use your hard earned cash? Many people turn to personal loans to cover their dream wedding or special event. And while you can use a personal loan to cover your wedding that doesn’t mean it’s the best idea.

Before you take on a personal loan, ask yourself. Are you willing to live on a tighter budget for the foreseeable future in order to finance one big day? 

Underinsured or Uninsured Motorist

Accidents happen and one of the most common uses of personal loans are to cover the costs of an uninsured or underinsured motorist. With the costs of accidents rising, it can be difficult to cover the costs, especially when you’re not at fault.

High APR Loans

High interest rates can kill any debt relief plan. Using a personal loan to cover high interest expenses is another use case for personal loans. Whether its credit card debt or any other high interest debt product. Personal loans can help bridge the gap on your debt and lower interest rates.

Too Many Loans

Another common reason that people take out a personal loan is to consolidate debt. Debt consolidation is a way of combining multiple streams of debt from multiple creditors.`

Instead of having to remember and plan to pay a series of different creditors, you can just pay one. The goal of consolidation is to ensure that your personal loan offers a lower interest rate and lower monthly payments.

However, even if you find a personal loan with the same interest rate as your previous loans you can still make the repayment process easier by only having one lender. 

Talk to an Expert on Debt Relief

Ready to take the next step toward a debt relief solution that works in your favor? Alleviate Financial has the right program for you. No matter your debt relief needs, or how long you’ve needed debt relief services, Alleviate Financial can help set you on the right track.

These common reasons for personal loans work in some cases, but there are other options for debt relief that may not require additional debt. Alleviate Financial’s debt relief programs can help you with unmanageable debt. Contact us at 800-877-2309 at Alleviate Financial today!