Are you struggling with multiple debts, and paying high interest rates gives you a headache? Relax, not anymore! The power of a personal loan could actually make things easier. By turning several payments into one, it might help—but is it really the smartest move?
Let’s know if it is or not. In this blog, we will understand both the pros and cons of personal loans, which will help you make a smarter, more confident financial choice.
What Is A Personal Loan For Debt Repayment?
The unsecured loan you take from banks, credit unions, or online lenders all these loan types come under the personal loan category. A personal loan is not your regular mortgage or car loan. Why? Because it never asks you for any kind of collateral. Many people who borrow personal loans use them to consolidate multiple debts into one fixed monthly payment. Which is a great way to potentially lower your interest rate.
However, before jumping to the details, it is very important to know the potential advantages and disadvantages of a personal loan.
Pros Of Using A Personal Loan To Pay Off Debt:
Taking a personal loan can have some major benefits if you use it in the right way.
1. Personal loans are cheaper than credit card debts:
Do you know why most people opt for a personal loan rather than opting for a credit card loan?
Well, it is all because of the lower and favorable interest rate a personal loan comes with. A credit card might give you flexibility, but it might also keep you stuck in the loop of debt.
Sometimes your credit card interest rate can change from 20% to straight up 40%, which makes it quite hard for you to pay off the debt. But when we talk about a personal loan, the interest rate is not much. Even in the worst scenario, the interest rate will switch from 12 to 18%, depending on how great your credit score is.
Paying lower interest means you lose less money to interest, thus allowing you to clear your debt faster.
2. Simplified Debt Management:
With a personal loan, you no longer have to juggle multiple bills and keep track of every due date. All you need to do is chill and allow your personal loan to consolidate all your debts into one single monthly payment. So, no more headaches just because you missed a month’s due date.
A personal loan reduces your chances of missing payments and helps you stay organized. Plus, most people now advise keeping one fixed installment system rather than having multiple payments scattered across different dates.
3. Fixed Repayment Schedule:
If you have credit card debt and are paying a minimum balance every month, no doubt it will keep you in a loop for years. Doesn’t matter even if you pay every month, the high interest rates will keep you invested forever.
However, a personal loan comes with a fixed time period, and you will have to pay off your debt within that very period. This repayment term can be anything between 2, 3, and 5 years. Having a structured repayment term helps you know when exactly you are going to be free from your debt forever. Hence, it gives you financial clarity and motivation to stick to your repayment plan.
4. Personal Loan Can Boost Your Credit Score (If You Manage It Well):
When you pay off your credit card debt using a personal loan, your credit utilization ratio decreases. As we know, credit utilization is what makes up a large portion of your credit score.
Using it properly can improve your scores over time. Also, when you make on-time installment payments of your personal loan, it helps you build a positive payment history.
5. You Don’t Have To Keep Any Collateral For a Personal Loan:
A personal loan is not your regular secured loan; they are unsecured. That means you don’t have to risk your house, car, or other valuable assets for the sake of your personal loan. This, in turn, makes your personal loan one of the safest options, especially for people who don’t want to pledge collateral to borrow money.
Cons Of Using A Personal Loan To Pay Off Debt:
Though we have covered how using your personal loan to pay off debt can be beneficial. Personal loan comes with their own set of negatives. Let’s know what those are.
1. Qualifying For A Personal Loan Can Be Difficult:
Not everyone qualifies for a personal loan with favorable terms. When it comes to personal loans, lenders will only look at your credit score, your income, and your debt-to-income ratio. If they find your credit history is not to the point, don’t worry, you will still get the loan, but at a very higher interest rate. This eventually defeats the purpose of debt consolidation.
2. Fees And Hidden Costs:
Your personal loan comes with origination fees that can range between 1-8% of your loan amount. Even if you try to pay off the debt early and get free from the debt barrier forever, you will need to pay payment penalties. Do you also think it’s unfair?
Well, for borrowers it is. These additional costs can make the loan more expensive than you might have expected, especially if you’re already struggling with debt.
3. May Not Be Cheaper In The Long Run:
Even if you think your interest rate is lower than your credit card debt, it truly might not be. The total overall cost of your personal loan depends on your repayment term. If you have a long-term loan, you might be paying more interest over time, even if the monthly installments feel manageable.
4. Fixed Monthly Obligation:
Having a fixed monthly payment schedule is an advantage to many, but it is a drawback to people who don’t have a stable income every month. Personal loans are not like credit cards; they don’t offer minimum payment flexibility, but require a set installment every month. And if you miss any payment, it will damage your credit score severely.
Conclusion:
Using your personal debt to pay off your other debts can be a useful tool if you manage it wisely. It not only lowers interest rates but also simplifies repayment, and might also improve your credit score. However, it still comes with its own set of risks, like fees, strict installments, and the chance of more debt remaining. Being disciplined determines whether it becomes a smart financial step or not.