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Should You Get a Personal Loan to Pay Off Debt?
by
JG Wentworth
•
October 4, 2024
•
8 min
In today’s financial landscape, many individuals find themselves grappling with multiple debts and considering various strategies to manage their financial obligations. One option that often comes up is using a personal loan to consolidate and pay off existing debts. This article aims to help you understand when taking out a loan for debt might be beneficial and when it might not be the best course of action.
Understanding Personal Loans
Before diving into whether you should use a personal loan to pay off debt, it’s crucial to understand what personal loans are and how they work.
A personal loan is a type of unsecured loan, meaning it doesn’t require collateral. You borrow a fixed amount of money and agree to repay it, plus interest, in regular monthly payments over a set term, typically ranging from one to seven years.
Key features of personal loans include:
- Fixed interest rates (in most cases)
- Fixed repayment terms
- No collateral required
- Lump-sum funding
- Various use cases, including debt consolidation
Personal loans are offered by banks, credit unions, online lenders, and peer-to-peer lending platforms. The interest rates, terms, and qualification requirements can vary significantly among lenders.
The Concept of Debt Consolidation
Using a personal loan to pay off debt is a form of debt consolidation. Debt consolidation involves combining multiple debts into a single loan or payment. The goal is often to secure a lower interest rate, lower monthly payment, or both.
When you use a personal loan for debt consolidation, you’re essentially replacing multiple debts with a single loan. This can simplify your finances by giving you just one payment to manage instead of several.
Pros of Using a Personal Loan to Pay Off Debt
There are several potential advantages to using a personal loan to pay off debt:
- Lower interest rates: If you have high-interest debt (like credit card debt), you might be able to secure a personal loan with a lower interest rate, potentially saving money over time.
- Fixed repayment term: Unlike credit cards with revolving balances, personal loans have a set repayment period, giving you a clear payoff date.
- Simplified finances: Consolidating multiple debts into one loan means you only have to manage one payment instead of several.
- Predictable payments: Personal loans typically have fixed interest rates, meaning your payment remains the same each month, making budgeting easier.
- Faster debt payoff: With a potentially lower interest rate and fixed term, you might be able to pay off your debt faster than you would making minimum payments on credit cards.
Cons of Using a Personal Loan to Pay Off Debt
While there are benefits, there are also potential drawbacks to consider:
- You’re not paying off debt, just moving it: A personal loan doesn’t eliminate your debt; it restructures it. You still owe the money.
- Potential for higher total interest: If you extend the repayment term significantly, you might pay more in interest over time, even with a lower rate.
- Origination fees: Many personal loans come with origination fees, which can add to the cost of the loan.
- Risk of accruing more debt: If you use a personal loan to pay off credit cards but then continue to use the cards, you could end up with more total debt.
- Collateral may be required for large loans: While most personal loans are unsecured, some lenders may require collateral for larger loan amounts.
- Impact on credit score: Initially, your credit score might dip due to the hard inquiry and new account. However, this effect is typically temporary if you make payments on time.
There’s Always JG Wentworth…
Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
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When to Consider a Personal Loan for Debt
Using a personal loan to pay off debt can be a good strategy in several scenarios:
- You have high-interest debt: If you’re carrying high-interest debt, particularly credit card debt, and can qualify for a personal loan with a significantly lower rate, it could save you money.
- You have multiple debts to manage: If you’re struggling to keep track of multiple payment due dates, consolidating into one loan can simplify your finances.
- You have a solid plan to avoid future debt: A personal loan can be effective if you’re committed to not accruing new debt while paying off the loan.
- Your credit score has improved: If your credit has improved since you took on your original debts, you might qualify for better terms with a personal loan.
- You need a fixed repayment schedule: If you want the structure and predictability of fixed payments over a set term, a personal loan could be beneficial.
When to Avoid Using a Personal Loan for Debt
There are also situations where using a personal loan might not be the best choice:
- You can’t qualify for a lower interest rate: If the personal loan rates you’re offered aren’t lower than your current debt’s rates, it might not be worth it.
- You haven’t addressed the root cause of your debt: If overspending led to your current debt, taking out a personal loan without changing your habits could lead to more financial trouble.
- You’re close to paying off your current debts: If you’re near the end of your repayment period, starting a new loan might not make financial sense.
- You can’t afford the monthly payments: If the consolidated payment would strain your budget, it’s not a good solution.
- Your debt is mostly low-interest: If most of your debt is already at a low interest rate (like federal student loans), consolidating with a personal loan might not offer significant benefits.
How to Choose the Right Personal Loan
If you decide a personal loan is right for you, here’s how to choose the best one:
- Compare APRs: The Annual Percentage Rate includes both the interest rate and fees, giving you a true picture of the loan’s cost.
- Check for fees: Look for origination fees, prepayment penalties, and late payment fees.
- Consider the term: Longer terms mean lower monthly payments but more interest over time. Choose a term that balances affordable payments with minimizing total interest.
- Look at the lender’s reputation: Check reviews and ratings to ensure you’re working with a reputable lender.
- Examine eligibility requirements: Make sure you’re likely to qualify before applying to avoid unnecessary hard inquiries on your credit report.
- Consider secured vs. unsecured: Secured loans might offer better rates but require collateral.
The Application Process
If you decide to proceed with a personal loan, here’s what to expect in the application process:
- Check your credit: Review your credit reports and scores to understand your standing.
- Gather necessary documents: You’ll typically need proof of income, employment verification, and details about your existing debts
- Shop around: Get quotes from multiple lenders to find the best terms.
- Prequalify if possible: Many lenders offer prequalification with a soft credit check, which doesn’t affect your credit score.
- Submit your application: Once you’ve chosen a lender, submit a formal application.
- Review the loan agreement: Carefully read all terms and conditions before accepting the loan.
- Use the funds to pay off existing debts: Once you receive the loan, immediately pay off the debts you intended to consolidate.
The Bottom Line
Using a personal loan to pay off debt can be a powerful financial tool when used correctly. It can simplify your finances, potentially save you money on interest, and provide a clear path to becoming debt-free. However, it’s not the right solution for everyone or every situation.
Before deciding to use a personal loan to pay off debt, carefully consider your financial situation, the terms of the loan, and your ability to manage the new payment. Remember that a personal loan is still debt – it’s crucial to have a solid plan for repayment and to address the root causes of your debt to avoid falling back into financial trouble.
If you’re unsure about the best path forward, consider speaking with a financial advisor or credit counselor. They can provide personalized advice based on your specific situation and help you develop a comprehensive plan for managing your debt and improving your overall financial health.
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The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 51% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.