Even if you make timely monthly payments, paying off debts like credit cards can take forever. Therefore, people usually seek other means to pay such debts off, such as a loan.
These loans can come in handy in a dire financial situation. But it can be really confusing to determine what you should be doing when you are already in debt and require financial assistance to get out of the situation.
In such a crisis, people are left with two choices- either consolidate their debts into a loan or use a personal loan to pay off the debt.
Moreover, the loan provisions can vary depending on the province you live in. You can click here to know more about debt consolidation in Ontario, but if you’ve ever asked yourself “is it better to get a personal loan or debt consolidation”, read on to get the answers.
What is a personal loan?
A personal loan is a financing tool you can use for personal affairs. For instance, you can use up a personal loan
- to make expensive purchases
- for debt consolidation
- for home renovations
- for sudden or unexpected emergency expenses
- to set up small businesses or entrepreneurship, etc.
Typically, you can borrow a personal loan amount with a condition to repay it over a fixed period with interests and fees based on agreed-upon terms. You can obtain a personal loan from banks, credit unions, or private lenders.
Personal loans can be both secured and unsecured. If a personal loan is secured, you need to put any of your property (that can be your house or your car/boat or any other asset) as collateral against it.
On the other hand, an unsecured personal loan does not require any collateral. However, most personal loans are unsecured. Moreover, personal loans are usually flexible. Depending upon your qualification, you can get a good deal of money with a personal loan.
What is a debt consolidation loan?
A debt consolidation loan is a kind of personal loan. You can apply for a debt consolidation loan when it gets difficult for you to pay off multiple high-interest debts simultaneously.
A debt consolidation loan aggregates the outstanding amount of all the other debts to consolidate them into one single loan with, generally, a lower interest rate. That results in paying off debts in a simpler way by making one single payment a month instead of multiple ones.
What’s the difference between a personal loan and a debt consolidation loan?
When deciding between a personal loan or debt consolidation loan, be aware that usually, a debt consolidation loan is considered different. But in reality, a debt consolidation loan is also a type of personal loan. While a debt consolidation loan is a personal loan, a personal loan is not necessarily a debt consolidation loan.
So, the question that remains to be pondered is what sets them apart? The only difference between these two types of loans is the purpose they cater to.
- You apply for a personal loan to make up for your expenses that can range from a wedding, home maintenance, funerals to the purchase of machinery or equipment or anything else.
- Moreover, a debt consolidation loan is intended to consolidate or combine all your existing debts to make it easier for you to make the monthly payments against all your debts in one go.
- Once you obtain a debt consolidation loan, you make one payment a month covering all the existing debts. They generally come with a considerably lower interest rate than your existing debts.
- The credit score requirements may differ in both respects. Funds may also be distributed differently under both options.
Ideally, these modes of finances are unsecured, although the requirements and conditions might differ with different lenders.
Benefits of debt consolidation loan
When compared to personal loans, debt consolidation loans can provide you following benefits–
- One–time Payment: Consolidating your debts leave you with just one monthly payment for all your existing debts, thereby relieving you from the burden of making multiple high-interest infested payments.
- Lower Interest Rate: A debt consolidation loan can reduce your interest to a considerably lower rate when compared to what you were paying earlier.
- Flexible Repayment Terms: Debt consolidation loans also offer you flexible repayment terms. That is, you can choose your repayment term according to your convenience.
For example, if you need lower monthly payments, you can choose longer payment terms. If you want to pay off your debts as soon as possible, you can very well select shorter repayment terms.
- Collateral Flexibility: With consolidated debt loans, you get the flexibility to choose a loan without any collateral in case you qualify for one.
- Fees: While some lenders prefer to charge fees like origination fees, late fees, or prepayment penalty fees, you always have the option to choose one that doesn’t charge such amounts.
Endnote
Personal loans, including debt consolidation loans, are great and convenient financing tools to help you meet financial urgencies, including repayment of debts.
But, while applying for a loan, you need to keep this thought in the forefront that taking a loan to release your current or temporary burdens will further impose another burden of debt over your head.
So, always make a habit of controlling your temptation of borrowing more money than you need. It will eliminate the need for borrowing a personal or debt consolidation loan in the first place.
Besides, always remember that debt consolidation should be an option when dealing with the burden of paying various monthly payments for multiple high-interest debts each month.
FAQs
When should you use a personal loan for debt consolidation?
It would be best if you avoid using a personal loan for debt consolidation in the first place. Because, apparently, you’ll be borrowing money to pay off the money you borrowed earlier. And if you are not good at managing your expenses, the chances are that you’ll be in debt of credit cards and other expenses while already having a personal loan to pay off.
Therefore, it is recommended to use a personal loan for debt consolidation only as a last resort. You can try saving up to pay off the debts and making a payment amounting to more than the minimum amount to get out of the debts.
Does debt consolidation affect your credit score?
To answer in one word, yes. If you are punctual about paying off your debt on time, it will certainly improve your credit score. But if otherwise, there are higher chances of getting your credit score damaged.