Personal debt in the United States is a major issue for many consumers today. From student loans to high credit card balances, it can be difficult to keep on top of your monthly payments. In fact, recent data from Experian revealed some eye-opening statistics that show just how integrated consumer debt is into our daily lives:
- 60% of consumers have a credit card
- 40% have a retail store credit card
- 32% have an auto loan
- 24% have a mortgage
- 14% have a student loan
- 11% have a personal loan
If you resonate with these rates or have struggled to manage multiple bill payments at a time, you might have considered how personal loans and debt consolidation loans can help you get back on track. But before you apply for a new loan, it’s important to know the differences between personal loans and debt consolidation loans to determine which one is right for your financial situation.
A personal loan is a generic loan type that can be used for just about anything, including debt payment and consolidation. In order to get a personal loan, you’ll have to be approved by a lender who will evaluate your credit score and other indicators in your financial history to determine whether or not you qualify to borrow money from them. If you’re approved, the lender will allow you to borrow a certain amount, and will tack on an interest rate, which you will be responsible for on top of your loan amount.
If you choose to use your personal loan to consolidate your debts, you’d effectively pay off your debts with your loan amount and then continue to make single, recurring payments to settle your personal loan debt instead of paying multiple bills for each balance.
The thing to keep in mind with personal loans is that they often have high interest rates—because they are not secured—which could increase the amount you’re spending in order to settle your debt. Of course, this depends on your interest rates for your mortgage, student loans, and credit cards, which vary.
Debt Consolidation Loans
Another way to combine your loans so that you only have to make one payment instead of multiple is to obtain a debt consolidation loan. Unlike personal loans, debt consolidation loans are secured with collateral like your home or financial assets like stocks and bonds, so that, in the event you default on your loan, the lender can repossess your assets.
Because of the loan security, debt consolidation loans tend to have lower interest rates than personal loans. As far as actually combining your loan payments, debt consolidation loans essentially work in the same sense that personal loans do. Once you obtain the loan, you would pay off your existing debt and then continue to pay off your debt consolidation loan until your balance reaches zero.
When choosing a debt payment plan that works for you, it’s important to educate yourself on your options and consider how they impact your financial situation. Use this post as a guide to help you make the right debt consolidation decision for you!