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Effective Ways to Consolidate Debt with a Personal Loan

Effective Ways to Consolidate Debt with a Personal Loan

Paying off debt can be an exhausting and expensive process, especially if you're managing multiple debts every month. And with higher interest rates charged on these debts, your dream of being debt-free can seem far away. However, it shouldn't be. One of the most popular ways to get out of debt faster is to consolidate debt with a personal loan. Consolidation through this method is simple and hassle-free. With a personal loan to consolidate your debts, you can make one payment each month instead of multiple of them.

What is Debt Consolidation?

Debt consolidation is a process of combining multiple debts into one payment. The main objective of doing so is to make debt management easier. Besides, it can help lower the overall interest rates you pay on the debts.

For those looking to take a great approach to manage debt, consolidating it can be the most effective solution. Loans for debt consolidation work differently from balance transfer credit cards. The main difference is that with a loan, you will receive all of the money and use it to pay off the existing loans in full, whereas balance transfer cards let you transfer your multiple debts onto one card.

Any loan you take to pay off other debts is a debt consolidation loan, though some lenders specifically provide debt consolidation loans. Whether a borrower is taking the loan to repay existing debts or opting for one labeled as such by lenders, the main goal is to repay the debts and save money by getting a low-interest rate or a long repayment period.

A personal loan for debt consolidation can typically include various expenses, such as credit card bills, medical expenses, payday loans, and even student loans. However, some lenders may specify what the funds can be used for.

If you want a personal loan, you may easily get it from online lenders or credit unions. Before the lender approves the loan, they will check your credit score and your financial history. This will determine whether you can secure the loan or not.

Reasons to Consolidate Debt with a Personal Loan

1. Reduces Interest Rates

The main benefit of debt consolidation is that it helps to reduce the interest rate currently charged, especially on credit cards which always have higher interest. Consolidating your debt into one simple loan could potentially lower your interest rates. This is especially true if you initially incurred the debt with a poor credit history.

Most people are burdened with debt that carries a high APR of 30% or even more. If you take a consolidation loan, you'll likely get it at a lower rate. The main aim is to save more money. So, your first consideration should be on interest rates if you want to save.

2. It Can Boost Your Credit Score

When you consolidate debt with a personal loan, your credit score can be improved. Doing this lowers the credit card utilization rate, a primary factor determining the overall credit score. The credit utilization ratio is simply a measure of the total credit amount you currently use. The credit utilization ratio percentage is found by dividing the total credit amount you use by the total revolving credit you have.

This percentage will indicate how much money you use from all sources of revolving debt. If you use more credit limits, the utilization rate increases, which may reduce your credit score. Transferring these balances to a loan will not be considered part of the debt-to-credit ratio since a debt consolidation loan is not a revolving type of credit.

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3. Streamlines Your Monthly Debt Payments

For those struggling to pay multiple bills on time or simply feeling overwhelmed by the number of payments they make monthly, consolidating them into payments is the only easiest way out. This is a crucial step towards proper debt management and avoiding paying more money. Debt consolidation will simplify your repayment by creating only one monthly due payment and interest rate. Some people find it easier to manage their payments and budget effectively when they streamline the payments into one.

4. Good Repayment Tenure

Struggling with a huge debt? It's time to take control. Merging your bills into one personal loan with a fixed repayment term is ideal. You will have clarity over when payments are due and how long it will take before you're free from financial burdens. With this certainty in place, success is just around the corner.

A financial plan is essential for managing debt. Credit cards are convenient, but their flexible payment options make it difficult to determine when the balance will be completed. However, with loans that set a fixed number of payments, such as 36 or 48 months, people can more easily create realistic savings goals once they have paid off the loan.

How to Consolidate Debt with a Personal Loan

Now that you understand why you should use a personal loan for paying your debts, here are steps to

1: Determine the Amount You Want

To determine the amount you require, start by calculating your total outstanding debt and subtracting any amount you can get from redeeming your investments or a soft loan from your friends or parents.

2: Check Credit Report to Ensure a Smooth Loan Application

Knowing your credit score before requesting a loan will allow you to fix any errors on your report and take appropriate action. Fortunately, the credit bureaus allow you to obtain a credit report to know your current financial standing. Accessing your credit reports from online lending platforms will give you the advantage of receiving personalized loan offers based on your current credit score. What's more, examining loans through financial marketplaces won't influence your overall credit score negatively either.

3: Find the Best Loan Offer

When you have determined your desired loan amount, it's time to find an ideal personal loan offer that meets all your needs, from interest rates to tenure. You can begin by inquiring with banks and NBFCs where you already hold a deposit or another loan account. Then compare the interest rates of several lenders. Also, you can check other online lenders. You can also check for the offer with other lenders. However, the best way is to visit lendingplate website and apply for a personal loan.

4: Pay Debts with Higher Rates First

If you can't pay off all of your outstanding debt, it's critical to prioritize which loans should be paid first. Those with both loan and credit card payments should take care of their cards first, as their interest is usually very high. If you don't pay on time, you will be charged late payment fees, which will be added to the existing debt.

5: Pay the EMIs of Your New Loan on Time

To keep penalties and your credit score in check, pay off any existing loans using the new loan. Additionally, set up automated monthly payments from your salary or primary account so that you never miss paying EMIs.

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Will Debt Consolidation Hurt Credit Score?

Although debt consolidation loans can hurt the credit score, it's only temporary. Usually, the lender performs a credit check before approving the loan. When the lender checks your score, it results in a hard inquiry that can lower your score by 10%. These inquiries affect your credit score for only one year.

If you close your credit accounts after consolidating their balances could also result in a low credit score. 15% of your score is determined by how long you've had active credit accounts, so closing them could have a detrimental effect on your score. A longer history corresponds with a better rating; thus, when you close an old account or start a new one, it will lower the average age of your credit history. To avoid such results, keep all old cards open even if you are not using them.

Even though debt consolidation can have negative impacts, it is still a powerful debt management strategy that can improve your credit score with time. With a payment history of 35% of your overall credit score, consistently paying on time goes an incredibly long way in helping you build or maintain your good standing with lenders. Additionally, using a personal loan to consolidate debts will likely improve the credit mix and increase the credit score.

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The Takeaway

If you want to manage your debts effectively, consolidate debt with a personal loan. Combining multiple debts into a single payment is a great way to quickly manage and pay off your debts. Look for a loan with lower rates so that you don't repay a lot of money, and most importantly, remember that debt consolidation can have positive and negative effects on your credit score, so be mindful of your repayments to maximize its benefits.

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