Using a person loan to consolidate a debt has its pros and cons. A personal loan is defined as any unsecured or secured loan obtained from a bank. With a secured loan, the person receiving the loan must offer something for collateral while with an unsecured loan this is not required. Both home equity loans and mortgages are considered to be a secured loan. In this case, if you fail to pay off this type of loan according to the terms you agreed to, the bank can take possession of your house.
Pros of Consolidating Debt with a Personal Loan
One advantage of using a personal loan to consolidate debt is that it will allow you to pay the same amount each month, making payments easier to budget for. This makes it easy for you to determine how long it will take to pay your debt off. For most people this is a better financial plan than simply paying the minimum amount due on your credit card every month until you have completely paid the balance off. Another benefit of paying off your credit cards using a personal loan is that interest rates on personal loans are somewhat smaller than the interest rates on most credit cards. However, this only applies to you if you have a good credit score. A bad credit score will cause you to have to pay high interest rates no matter what. When it comes to managing your finances, taking a personal loan is almost always a better option than running up a large credit card bill. If you unexpectedly find yourself dealing with a huge debt, a personal loan can be the best way to deal with it.
Cons of Consolidating With a Personal Loan
One disadvantage of using a personal loan to consolidate debts is that there are times when you might be hit with a prepayment penalty. This fee is one that is charged by lenders if you pay your loan off sooner than they expected you to. You are advised to ask if your personal loan would come with a prepayment penalty before agreeing to take the loan. Another disadvantage of using a personal loan to consolidate debts is that the loan payments might ultimately cost you more than it would to pay your monthly credit card bill.
These are the pros and cons of using personal loans to consolidate debt.