When you are faced with a financial crisis that requires borrowing money, you’ll have several options to consider.
While there are no debates about which home loan, student loan, or auto loan is right for you, some types of loans aren’t as straightforward as the mentioned loans.
For example, it’s a big challenge to choose between a personal loan and debt consolidation loan because they both serve almost the same purpose.
Is it better to get a personal loan or debt consolidation? The line between personal loans and debt consolidation loans is often blurred, no matter what financial situation you are facing.
Even if you ask around, some people will advise you to go for debt consolidation while others will advise you to go for a personal loan.
Let’s dig a little deeper into these two types of financial solutions to help you make an informed decision.
When To Consider Debt Consolidation
When you have several monthly bills, it will be easy for you to miss repaying some and getting late on others. This may happen even if it wasn’t your intention.
When you get late with your payments or you miss them, you’ll be hit with late payment fees and your interest rates may increase.
Sometimes you may realize that some of your loans attract very high-interest rates that make them expensive. That’s where debt consolidation comes in.
Through debt consolidation, you’ll replace all your loans with a single loan. Doing so will ensure that, instead of having to pay multiple debts every month, you’ll only have one loan to worry about, and you’ll be dealing with only one lender. This will make things easier for you, and you may end up with low interest rates.
Before you can receive a consolidation loan, the creditor would want to know whether you’ll be able to make the payments. They’ll check your income level and your loan repayment history.
However, unlike credit union or bank loans, debt consolidation loans are normally unsecured – no collateral needed.
Before you go for a debt consolidation loan, you must consider factors such as the loan duration, the interest rate, and the fees charged in processing the loan.
A consolidation loan should provide you with some relief and not add to your financial burden. So if a debt consolidation loan doesn’t come with any benefit, it’s better to leave it and look for other options.
The debt consolidation loan should benefit you in the following ways:
- It should ensure you only have a single payment per month
- It should decrease the amount you pay per month
- Your interest rate should decrease
- It should improve your credit score at the end of your payments
Choosing Between A Personal Loan And Debt Consolidation
Unlike a debt consolidation loan, a personal loan will add to your financial burden, and it may come at a higher interest rate.
Personal loans will come in handy when you are in need of an urgent financial boost like when your car has broken down while you are broke, you have a wedding, or you want to buy an expensive household item.
Just like a debt consolidation loan, personal loans aren’t secured, explaining why they attract higher interest rates.
As you can see, a personal loan can also help you consolidate your loans. However, this isn’t the best option for you. Debt consolidation loans are designed to help clear debts, while personal loans are designed to boost your cash flow.
That’s an important distinction that can help you decide which option to go for.
Is it better to get a personal loan or debt consolidation?
After going through this discussion, you must have realized that these two options are both important, but they are designed for different purposes. If you want to combine all your debts into a single loan, go for a debt consolidation loan.
On the other hand, if you are facing a situation that needs an urgent financial boost, go for a personal loan.
While a personal loan will increase your loan burden, a consolidation loan helps in solving your debt burden. All in all, you’ll need both of these options at different times.