Personal loans and debt consolidation loans are often confused. However, the reality is simple: a debt consolidation loan is a personal loan. The key distinction is that you apply for a personal loan in order to specifically consolidate your debts. Here, we explain what you need to know about personal loans for debt consolidation and how you can apply for one.
What is a personal loan?
A personal loan allows you to borrow a fixed amount of money that you receive as a lump sum. You agree to pay back the money in monthly instalments, plus interest. Personal loans come with fixed rates of interest, so you know precisely how much you will pay back over time. You can use your personal loan for multiple purposes, including car purchases, home improvement projects, or to consolidate your debts.
So, it’s accurate to say that a debt consolidation loan is a personal loan that you have taken out to consolidate your debts.
How does a debt consolidation loan work?
You first need to decide if a personal loan for debt consolidation is a good financial decision for you. Here’s an example to consider:
Let’s say you currently have three credit cards with £1,000 outstanding on each. They each have different interest rates – 20%, 30%, and 40%, respectively. That means you owe £3,000 and are paying an average interest rate of 30%, which is relatively high. So, if you can take out a new £3,000 personal loan for debt consolidation with a lower interest rate than 30%, you will end up saving money. What’s more, when you receive the money in your account, you can pay off your outstanding debts right away, and you only have one loan to worry about going forward. It’s a win-win!
When is debt consolidation a good idea?
If consolidating your debts saves you money and you can afford the new repayments, it’s a good option for you. As such, it’s always a good idea to use a loan calculator before submitting an application to see how much you can potentially borrow. You also need to be mindful of the new rate of interest that you’re offered, as this will affect the cost of your repayments over the course of the new loan. So, always consider the costs associated with debt consolidation before submitting an application.
How does debt consolidation affect your credit score?
In the short term, taking out a personal loan for debt consolidation will cause your credit score to dip. That being said, in the long term, debt consolidation will actually help your credit score, as paying off your debts responsibly and on time is the best way to improve your credit score. So, if you’re confident that you can meet the monthly repayments, a debt consolidation loan is a good option to consider.
Are there other ways to consolidate your debt?
If you’re not keen on applying for a personal loan, you can consolidate your debts with a balance transfer credit card. This enables you to bring several credit card debts into one new card, which makes it easier to track your repayments. What’s more, balance transfers are often offered with a 0% introductory rate, saving you money in the short term. Just be mindful that balance transfer cards often come with a fee, and the 0% interest rate won’t last forever.
Get started with debt consolidation today
There’s no doubt that applying for an unsecured personal loan to consolidate your debts can be a smart move for lots of borrowers. It makes it easier to manage your repayments and can save you money over time. So, do your sums and consider whether debt consolidation is a sensible financial step for you to take today.