By Lesa 
Trouble keeping up with all your debt payments each month?
Trying to pay off credit cards, medical bills, and loan debt all at once is stressful. Not to mention that interest is mounting while it feels like you’re getting nowhere. That’s why personal loans are such a popular option. Consolidate your debt into one low monthly payment.
But.
Consolidating isn’t a perfect solution. There are important things to consider beforehand — and if you overlook them, you could end up losing money.
What You’ll Learn…
- What Is Debt Consolidation With a Personal Loan?
- Should You Consolidate Debt With A Personal Loan?
- Things To Think About Before Applying For Debt Consolidation
- Signs That Debt Consolidation Isn’t A Good Idea
What Is Debt Consolidation With a Personal Loan?
Debt consolidation is the act of taking multiple outstanding debts and rolling them into one loan. Personal loan debt consolidation works like this:
- Apply for a loan from a lender.
- Use that loan to pay off debt with other lenders.
- Make monthly payments to the new lender.
Pretty simple, right?
Personal loans are some of the most common methods for consolidating debt. From big bank lenders to online loan places, they all work essentially the same. Consolidate your debt → get a lower interest rate → make one payment instead of many.
When comparing lenders, it can be helpful to understand exactly what you’re getting into. For example, here’s everything you need to know about Chase personal loans. If you know the rates, eligibility requirements, and terms of one of the biggest lenders out there, you can make better decisions.
Around 43% of personal loan borrowers take their loans out for the purpose of debt consolidation. That makes it the most popular reason for applying for a personal loan. And while borrowers who consolidate credit card debt reduce their balances by an average of 57% after consolidating… many of them rebuild those balances within 18 months.
More on that in a minute.
Should You Consolidate Debt With A Personal Loan?
For some people, debt consolidation via personal loan is a great choice…
And for others, it’s putting a bandaid on a much larger problem.
If consolidating will put you in a lower interest rate than you’re currently paying, it can work. You’ll pay less interest over the life of the loan and only have one monthly payment to budget for.
The problem is people often see consolidation as a free pass. They consolidate their debt into one loan, feel instant relief because their credit card payments are gone — and then run up their credit cards again. Suddenly they owe double on their loan.
If you’re going to consolidate, you have to change your spending habits too.
Things To Think About Before Applying For Debt Consolidation
Don’t just apply for the first loan you see. There are several important things you should consider before you even start your application.
Interest Rate
This is going to be the most important number for you. You don’t want to consolidate debt unless your personal loan interest rate is lower than what you’re currently paying.
Personal loan interest rates range from approximately 6.49% to 36% APR, depending on your creditworthiness. This means you’ll need to know the interest rates you’re currently paying before even considering consolidation.
Credit Score
Your credit score determines what interest rate you’ll be offered on a loan.
If your credit score is poor, you may be offered a personal loan with a higher interest rate than your current debt. If that’s the case, it actually costs more to take the loan.
Before applying for any loans, you should pull your credit report and correct any mistakes. Increasing your credit score slightly before applying can help you get a better rate.
Fees
Not all loans are created equal. Some lenders charge an origination fee (which is subtracted from the loan amount when you receive the funds) and others have prepayment penalties.
Know all the fees involved and calculate your total loan cost. Just looking at the monthly payment can be misleading.
Loan Term
Longer loan terms equal lower monthly payments. But they also equal paying more in interest over the lifetime of the loan. Shorter loan terms hurt your monthly budget but save you money.
Be sure you’re getting a loan that you can truly afford — not just one that looks good on paper.
Debt-to-income ratio
This is another big factor that lenders use to determine if you’ll qualify for a loan. Your debt-to-income ratio (DTI) is the total amount of your monthly income that goes towards paying debts. Ideally, your DTI should be below 35-40%.
If your DTI is high, you may have trouble getting approved. Or you may be approved but at a high-interest rate.
Signs That Debt Consolidation Isn’t A Good Idea
Some lenders aren’t your friend. Avoid applying if you encounter the following things…
- Interest rates that are lower than what you already owe. (There’s fine print that makes up for that difference.)
- Pressure to apply now. Legitimate lenders let you walk away to think about it.
- Lenders that claim they don’t do credit checks. Personal loans ALWAYS require a credit check.
- Unclear fees or terms. Any lender that doesn’t disclose every cost associated with the loan isn’t worth your time.
One of the best things you can do when trying to find the best loan is to shop around. Compare rates from multiple lenders to find the best one.
Just 1-2% difference in interest rate can equal hundreds of dollars saved over the course of a loan.
The Bottom Line: Here’s What It All Comes Down To
For some people, debt consolidation through a personal loan is an excellent option. It simplifies finances and saves money on interest.
For others, it creates a false sense of relief and leads to more debt.
Here’s what you need to know:
- Make sure the new loan has a lower interest rate than your existing debts.
- Know your credit score before applying and take steps to improve it if necessary.
- Read every fee and term before agreeing to a loan.
- Have a plan to avoid accumulating debt after your debt is consolidated.
Debt consolidation loans can help you take multiple payments that are tearing you apart and condense them into one single payment you can manage. But only if you know what you’re doing.
Take the time to do your research. Compare lenders, and know your finances before you apply. That’s the difference between someone who gets their debt under control and someone who just digs themselves into a deeper hole.