6 Good Reasons to Get a Personal Loan to Payoff Debt and One Not-so-good Reason
A personal loan is the best way for some people to pay off debt. Like all debt relief options, however, it's not a one-size fits all solution.
If you can pay off the debt on your own at comparable total costs, without taking out a loan, do it. Use our Snowball Calculator to run the numbers on what you can do on your own to save money paying off your debt.
Preliminary Steps to Pay-off Debt
You can fall into debt for a number of reasons. How you accumulated the debt is less important than your behavior moving forward.
There are a few steps you should take if you are carrying that debt you don’t pay off each month. (It can’t hurt to do it even if you are not carrying debt.)
- Strict budget review- Account for how each dollar you bring in is spent. Our easy-to-use Budget Calculator is a great way to assess quickly your cash-flow and spending habits.
- Trim spending- Find money you can cut from your spending, or ways to spend less for things you need, and use it to pay off your debt. If you trim spending and still can’t make significant progress on paying off your debt, you should look at different debt payoff options.
Good Reasons to Use a Personal Loan to Payoff Debt
For a personal loan to be a solid option for paying off your debt you need to have good credit or better. Though there are some personal loans avaialble to people with poor credit, the rates are high. A personal and it is not a good way to get out of debt with poor credit.
You also need to be employed with steady, verifiable income.
If you have good credit and regular pay, it is worth considering how a personal loan to payoff debt can benefit you. Here are six good ones and one that is not so good:
- Save Money-Put more money in your pocket by reducing the costs to get out of debt. If you are carrying high-interest rate credit card debt, a debt consolidation loan could reduce your total costs to pay off your debt. Your new loan will pay off your current creditors by taking all your existing debts and rolling them into a single loan with a lower interest rate.
- Reduced Stress from having a defined plan in place. When you are carrying debt it is easy to be stressed out. How much you owe and the difficulty you have in making payments contribute to just how stressed you may be. But you don’t have to owe a ton or be in collections to feel stressed. If you are in that position now, headed that way, or are carrying even a few thousand dollars in debt that you are not paying off quickly, stress is natural.
An American Psychological Association study examined the link between financial stress and health. Among the study’s findings the APA said:
- More than one-quarter of adults (26 percent) report feeling stressed about money most or all of the time.
- More than half of adults (54 percent) say they have “just enough” or not enough money to make ends meet at the end of the month.
- Nearly one-third of Americans (32 percent) say that their finances or lack of money prevent them from living a healthy lifestyle.
The APA study was done in 2014, but there is no reason to think that the patterns they detected are not present today, even if the numbers may be slightly different
- Continuing the way you are is not an option. If your debt level is rising each month, you know you can’t continue down the same path indefinitely. At some point in time you’ll max out your credit limits; you will no longer be able to pay for gas, groceries, or any purchases with your credit cards. Don't wait until the debt level grows to the point that your options narrow.
Many people think that you must have bad credit or an inability to make required payments to end up with a lot of debt. Not true. There are many Americans carrying $10,000, $20,000, $30,000 or even more in unsecured debt who have strong credit. In fact, to accumulate a lot of credit debt is a sign that you have, or had, good credit. Look into a personal loan while your credit is strong enough to get good rates.
You will get better interest rates with a strong credit score. It is good to know your credit score before shopping for any financial service. One, you will protect yourself from people who misrepresent your situation to take advantage of you. Two, you sound like a more informed consumer, which leads to you getting better information from people who know they can't misinform you or lose your business. Get a free score here.
- Convenience- When you take out a debt consolidation loan that pays off multiple debts, you replace the many monthly payments with different due dates with one, easy to manage monthly payment.
- Build Credit-Part of your credit score is based on the mixture of type of credit accounts you have. Opening a personal loan can help your score by improving this area. Another way it helps your score is that paying off all your credit cards leaves you with credit limits that show $0 owing. As long as you don't run up new debt, your low credit utilization will boost your score significantly.
- Forced Discipline- A personal loan is usually repaid over 2-5 years. You agree to make a fixed monthly payment for a set nuber of months. That payment is higher than the minimum payment credit card companies allow. If you are paying more than your minimums your new loan payment may still very well may be more than you are paying. This isn't bad, as long as you can afford the payment. Binding yourself into a loan payment that will save you money encourages you to get the debt paid off faster. Many personal loan lenders will encourage you to set up an automatic withdrawal to make your payment, making your commitment even firmer.
One Not So Good Reason to Payoff Debt with a Personal Loan
You will probably see "Get a Lower Payment" if you read other lists about the benefits of a personal loan to consolidate debt.
There are two reasons that it is not such a good idea.
- You are not going to be offered a lower payment. Monthly payments on a personal loan are almost always higher than the payments required by the creditors you pay off in the loan.
- It costs you more money to pay back a loan with a smaller payment. There are times when you may need to reduce costs wherever you can, even if it costs you more in the long run, just to pay all your debts responsibly.
- There are a number of solid reasons to take out a personal loan to pay-off your debt, but none are worthwhile unless you commit to not running up new debt.
- Never commit to a personal loan when you are unsure of your ability to repay the debt as agreed.
- Shop around to find the best rate, focusing on lenders who start with a soft pull of your credit report, here.