Living with debt has simply become a fact of life for many Americans. In fact, in 2017, the average American household carried over $137,000 in debt
. That includes debt from student loans, auto loans, home mortgages, credit cards, and more. Of course, in a society that glorifies living beyond one’s means, it’s no surprise that having a substantial amount of debt is a normalized American experience. But that doesn’t mean it’s not a huge issue. According to a survey from the American Psychological Association
, 72% of Americans have reported feeling stressed about money.
Debt can be particularly emotionally distressing, especially if you can’t see the light at the end of the tunnel — and having multiple sources of debt likely doesn’t do anything to help matters. For many people, though, there’s a useful solution: taking out a personal loan to use to consolidate your debt. Instead of making multiple payments to different lenders, a personal loan can help roll your total debt into one simple monthly payment to one lender.
Of course, a personal loan for debt consolidation isn’t the right choice for everyone. Here are some instances where it might make the most sense for you:
- You’re already actively working towards paying off your debt.
If you have debt, you’ve probably already come to the realization that it’s very difficult to pay it off if you don’t know where your money is going. Debt payoff takes careful planning — most of us don’t have an extra lump sum of money lying around at the end of every month. Instead, we have to analyze our spending patterns to see where we can afford to cut back to make room in our budget for debt payments.
If this sounds like you — if you know how to budget effectively and manage your cash flow — then great! Debt consolidation through a personal loan may be a great choice for you. Why? Simply put, a personal loan isn’t going to solve your debt problems or magically pay your debt off for you. What it can do, however, is simplify the work you’re already putting towards paying off your debt, and hopefully get you better terms for paying it off. A personal loan is a good option for debt payoff only if you already have a plan to pay off your debt in place and can afford to make the fixed monthly payments that the loan will most likely require.
Of course, you also want to consider the amount of debt you have before applying for a personal loan. For instance, if you have credit card debt that you’re set to pay off within the next six months, applying for a personal loan may not be worth your time. But if your combined consumer debt and student loans are going to take you several years to pay off, it may be worth looking into debt consolidation options.
- You’re in good shape when it comes to your credit.
Having substantial debt is not the same as having bad credit. If you have a solid history of making your debt payments on time, have kept your old accounts open to lengthen the age of your credit, and keep your credit utilization rate low, chances are, you have a decent credit score to back you up. This can be very helpful in making you a desirable candidate for a personal loan.
As with any type of loan, personal loan interest rates vary. The better your credit score, the lower the interest rate you can hope to qualify for — and the less your debt will likely cost you in the long run.
If you only qualify for loan interest rates that are on par with the rates on your credit cards (or whatever other debt you’re consolidating), it may not be worth it to consolidate at the moment. You can, however, try to grow your credit so you have a better chance of snagging a loan with a decent interest rate in a few months. First and foremost, you’ll want to focus on making your debt payments in full and on time, but there are also plenty of other ways you can grow your credit score. For example, you can call your credit card companies to try and get your credit limit increased. As long as you keep your spending under control, this can help you keep your credit utilization rate under the recommended 30%.
- Consolidating can help you save more over time.
Of course, a personal loan isn’t going to be worth much if it means it will cost you more to pay off your debt in the long run. You may be tempted to apply for a personal loan that lowers your monthly payments, as that would lighten your financial load in the immediate. However, make sure to read the loan terms and agreement in full before signing. If the loan term is much longer than your current debt payoff plan, it might end up costing you much more over time — despite that attractive lower monthly payment.
Before acquiring your personal loan for debt consolidation, run the numbers to see if it makes the most sense for you. After you’ve multiplied the fixed monthly payment per the number of months in the loan’s term, what is the total cost of the loan? If it outweighs the total cost of your current debt plan, it may be best to find an alternate solution. Alternatively, if it’s less than the total cost of your current debt plan, the personal loan may just be the way to go.
Remember, paying off debt is a common struggle, and you’re nowhere near alone — but you do have options to lighten your stress load. If you’re unsure of what to do, consider using a personal loan comparison calculator
to see what options may be available to you. And, as with any major financial decision, the choice to consolidate your debt with a personal loan is ultimately up to you.