Should I Get a Personal Loan to Pay Off Debt?

Debt is a growing problem for many people today. If you’re struggling under the load of debt, you may be tempted by the idea of taking out a personal loan to consolidate what you owe into one manageable payment.

However, you are probably asking yourself: “Should I get a personal loan to pay off debt?” Is it a smart move?

Here’s what you need to know before taking the plunge!

Understanding Personal Loans

A personal loan is money borrowed from a bank, credit union, or online lender that you repay over a set period of time with fixed monthly payments. Personal loans can be secured (requiring collateral like your home) or unsecured. Unsecured personal loans are much more common and are solely backed by your creditworthiness.

Personal loans have amounts ranging from $1,000 to $100,000 and terms lasting from one to seven years typically. The better your credit score and income, the lower the interest rate and more favorable repayment term you can qualify for on a personal loan.

Interest rates on personal loans currently average 10% to 28% APR. You receive the personal loan amount upfront as a lump-sum payment.

This money can be used for any purpose like consolidating high-interest debt, financing large expenses, or funding home improvements. Your fixed monthly payment stays the same over the full loan term and is applied toward both principal and interest until the balance is paid off.

Key Takeaway: A personal loan is a flexible, unsecured loan that you can use for a variety of purposes. It has fixed monthly payments and repayment terms lasting up to seven years.

Pros of Using a Personal Loan to Pay Off Debt

Consolidating multiple debts into one using a personal loan has some potential advantages:

• Lower interest rate. Personal loans often have lower interest rates compared to credit cards, enabling you to save on interest fees over time. A personal loan could handle debt repayment faster.
• The fixed monthly payment. It provides consistency for budget planning purposes.
• Consolidating into one loan. This one would simplify bill management compared to multiple credit cards.
• Timely repayment of the loan may improve one’s credit score over time.
• The structured schedule enables faster paydown than minimum credit card payments.
• Receiving the lump sum upfront provides funds to immediately eliminate old debts.

Key Takeaway: Consolidating high-interest debt with a personal loan could simplify your repayment plan, reduce interest fees, and improve your credit score.

Cons of Using a Personal Loan to Pay Off Debt

There are also some risks and downsides to be aware of when using a personal loan for debt consolidation:

• Possible higher rates – Those with poor/fair credit might pay higher interest rates for a personal loan compared to current debts owed.
• Fees – Personal loans can come with origination fees up to 6% of the loan amount. Be sure to factor this in.
• Credit damage if not repaid – Just like any other loan, failing to make personal loan payments will hurt your credit standing.
• Loan denial – Personal loan lenders can reject your application outright if you have bad credit or inadequate income.
• Debt cycle risk – If new debt is incurred on paid-off credit cards, you can end up deeper in debt with the personal loan still owed.
• Long payoff period – While fixed payments help eliminate debt faster, a 60-month personal loan is still a long payoff period during which interest accrues.

Key Takeaway: Using a personal loan for debt consolidation has some potential downsides, including higher interest rates, fees, and the risk of falling deeper into debt if old credit cards are charged up again.

When Should You Consider a Personal Loan for Debt Repayment?

In general, a personal loan makes the most sense to pay off credit card, medical, or other high-interest rate debt if:

• You qualify for a personal loan interest rate considerably lower than your current debts’ rates. This ensures savings on interest.
• Your credit score is good or excellent (690+, according to FICO). The higher your score, the lower the rate you’ll receive.
• You have a stable income to be approved for the loan and are confident you can make the monthly payments.
• The loan consolidation helps simplify and lower monthly payments compared to what you currently owe.
• You have a plan to avoid racking up new credit card balances after paying them off with the personal loan.

Also, be mindful of only borrowing what you can reasonably afford to pay back based on your income and budget. Using a personal loan calculator can help determine an appropriate loan amount for your situation.

Key Takeaway: A personal loan may be a good option for debt consolidation if it helps you save on interest, lower monthly payments, and simplify your repayment plan. Be sure to have a solid budget and payment plan in place before taking out a loan.

Alternatives to a Personal Loan for Debt Repayment

Personal loans are one option for dealing with debt, but there are other methods that may be better depending on your circumstances.

• Debt avalanche – Focus on paying extra toward the highest-interest rate debts first while making minimums on the others.
• Debt snowball – Pay off debts in order of smallest balance to largest. Builds momentum.
• Balance transfer card – A 0% APR balance transfer could substantially reduce interest expenses.
• Debt management plan – Working with a nonprofit counselor to negotiate lower rates and consolidate payments seems prudent.
• Budgeting and expense cuts – Working with a nonprofit counselor to negotiate lower rates and consolidate payments seems prudent.
• Debt consolidation loans – 401(k) or home equity loans may offer preferential rates versus personal loans for some.
• Bankruptcy – While bankruptcy discharges the debt, it severely damages creditworthiness for years.

Key Takeaway: A personal loan is one option for debt repayment, but it’s important to consider and compare other alternatives depending on your specific financial situation. Working with a professional financial advisor or nonprofit credit counselor can also help you determine the best course of action for managing and reducing your debt.

Final Thoughts

In the proper circumstances, a personal loan can be an effective instrument for consolidating and repaying high-interest debt expeditiously. However, risks and costs warrant careful evaluation and a repayment plan. Debt reduction necessitates discipline irrespective of approach.

All options and budget factors should be weighed to determine the optimal path forward. Consulting a financial advisor can provide invaluable guidance on the wisest strategy to achieve debt freedom.

Make your journey to financial freedom easier with a Level personal loan. Offering competitive rates and a simplified online application process, Level aims to provide a seamless experience in managing your debt. Remember, choosing the right personal loan depends on multiple factors, but with Level, you could lower your monthly payments, improve your credit score, and take a step towards debt-free living. So why wait? Start your loan application with Level today and make the smart choice for your financial future.