When researching financial solutions for debt payoff or loan options, you may come across personal loans and debt consolidation loans. Depending on your financial situation, these loan types and the process to get them definitely have their differences, along with advantages and disadvantages. Continue reading to learn more about both personal loans and debt consolidation loans/the debt consolidation process.
How Do Personal Loans Work?
Personal loans are a type of unsecured loan that is repaid in monthly installments. Secured personal loans are available, but they are not the norm. These loans generally have fixed interest rates and equal monthly payments until the loan is paid back. These loans are available in various amounts and repayment terms. And the funds from a personal loan can be used for all sorts of expenses, making them a good option for almost any expense.
You can find personal loans with banks, credit unions, and private lenders online or in person. With banks and credit unions, you will likely need a good credit score, while online lenders will likely allow more flexibility with approval. When you take out a personal loan, you usually have to start repayment 30 days after getting your funds.
The Application Process With a Personal Loan
If you haven’t applied for a personal loan before, you may be unsure about what the application process looks like. Here is a step-by-step guide to that process:
Apply for Pre-Approval With Lenders
Once you find a few lenders you want to work with for a personal loan, you need to apply for pre-approval. Lenders will ask about your income and your credit score. Once pre-approved, you’ll get a rough idea of what loan terms and the amount you will get.
Compare Your Loan Options
Once you have pre-approval with a handful of loan lenders, you can decide on the best option. You’ll want to find a loan that has a competitive interest rate, flexible repayment terms, a manageable loan term, and a loan amount that fits your needs.
Send in Documents for Pre Approval
Once you find a lender you want to work with, you’ll have to send in some documents. Most lenders will ask you to prove your identity and your income and okay a hard credit check. With this step, if you are approved, you’ll know the exact loan amount, interest rates, and repayment terms.
Once Approved, Get the Funds
Once you are approved for a personal loan, all you’ll have to do is sign the loan contract and get your funds. In most cases, a lender will have the funds sent to a bank account, mailed to you as a check, or have you pick up the funds at a location.
How Does Debt Consolidation Work?
Debt consolidation is the process of paying off multiple debts by using a single loan. Debt consolidation loans are the loan options that make doing so a possibility. They can be beneficial if you are juggling several high-interest loan options. With this process, you’ll only have one monthly payment to worry about, and with the right loan, you should get a better interest rate than the current debts you may have.
Repayment, loan terms, and interest rate for a debt consolidation loan will depend on the type of loan you take out. All kinds of loans and credit accounts can be used to consolidate debt, but you’ll find the following options are the most helpful:
A Balance Transfer Credit Card
Balance transfer credit cards are an excellent tool for debt consolidation because they can offer things like low or no interest for an introductory period. Most of the time, people pay off credit card debt with a balance transfer card, but you may be able to consolidate other types of debt with one of these options. Keep in mind that you may need a good credit score to be approved for a balance transfer card.
Specifically Debt Consolidation Loans
Although almost any loan can be considered a debt consolidation loan, you’ll find loan options specifically tailored for this process and thus the name “debt consolidation loans.” If you can qualify for one of these loan options, you’ll see a relatively low-interest rate and flexible loan terms.
The Debt Consolidation Process / Steps To Get a Debt Consolidation Loan
The process of consolidating debt is pretty straightforward; you’ll have to apply for a new loan and then use it to pay off your existing debt. Still, if it’s your first time doing so, you may need a step-by-step explanation. Here is the process:
Pick a Loan Type You Want To Borrow Money from and Find Lenders
The first step you’ll need to take is to figure out what kind of loan you want. Once you decide on that, you can try and find lenders for debt consolidation. Applying for pre-approval with one of these loans is similar to how things work with a personal loan. A lender will ask about our income, credit score, and ability to repay the loan.
Get Pre-Approved and Compare Your Loan Options
Once you have pre-approval with lenders, you can compare your loan options. With debt consolidation loans, you’ll want to make sure you can borrow enough funds to pay off your existing debts. Also, pay close attention to the interest rate, as you don’t want to borrow a more expensive loan when the goal is to get rid of existing high-interest debt.
Once Approved for the Loan, Get the Funds and Pay Off Your Existing Debts
The next step is to move forward with final approval; you will need several different documents that prove your income and identity and be okay with a hard credit check to pull your credit report. Once you get final approval, you will get the funds you need. You can then pay off any debt you may have, including existing credit card debt, a home equity loan, a personal loan, a payday loan, or any other credit account you have.
Begin Repaying the New Loan
Once all your existing debt is paid off with your new loan, the great news is that you will only have a single monthly payment rather than multiple loan payments to juggle! Usually, after 30 days, you will need to start repaying your new loan.
Using One of These Options To Pay Off Debt
You can use both a debt consolidation loan option (either a debt consolidation loan or a balance transfer credit card) and a personal loan for debt consolidation. Both options have pros and cons when using them for this purpose. With personal loans, you will likely find several options (even with a bad credit score). However, if you don’t have a lot of income or a low credit score, you may not get the loan amount you need with a personal loan. You can add a cosigner or co-borrower to the loan to help you get a higher loan. With a debt consolidation loan, you will likely find the best deal for debt payoff and longer repayment terms (which can be helpful when paying back a large loan).
If you aren’t pursuing one of these loans specifically for debt consolidation, you’ll find more information on whether each loan option is the right option for you.
Is a Personal Loan Right for Me?
A personal loan will work well for you if you have multiple small expenses, are facing an emergency, or need some extra cash for extra expenses. As mentioned above, these loans can be used for almost any expense, making them a good option for nearly any kind of expense. Even with bad credit, you should be able to borrow from one of these loan options.
And so, if you need money for various expenses, a personal loan will be right for you.
Is Debt Consolidation the Right Option for Me?
A debt consolidation loan is best if you need to pay off debt because these loans usually provide enough funding to cover a large amount of debt and come with competitive interest rates. However, if you aren’t using these loans to pay off debt, you may not be able to use them for any other expense.
Other Strategies To Repay Debt
A loan isn’t the only way to pursue debt payoff. Budgeting, debt payoff strategies, and even apps can help you get started to become debt free. Budgeting can help you get a picture of your expenses, income, and debt to help you figure out the best strategy to make your money work for you. And that can include helping you figure out ways to pay off debt. Or you can use one of the many debt payment strategies, such as the avalanche or snowball method. There are also apps that can link to your financial accounts and help you come up with a personalized debt repayment plan. And so, as you can see, a personal loan and debt consolidation loans are not your only option if you want to pursue debt payoff.