If you’re struggling to keep up with multiple debts each month, you’re not alone. In fact, you’re part of a growing trend; Americans now owe more than $14 trillion in debt, and the average household has $137,063 in debt, including mortgage debt, according to NerdWallet.
If you find yourself in this situation, you may be wondering if a personal loan or debt consolidation is the right solution for you. Both options have their pros and cons, and the best option for you will depend on your individual circumstances. Keep reading to learn more about personal loans and debt consolidation so that you can make the best decision for your financial future.
What is a Personal Loan?
A personal loan is an unsecured loan that can be used for almost any purpose, including consolidating debt. Personal loans are typically issued by banks, credit unions, or online lenders, and they range in amount from $1,000 to $100,000. The interest rate on a personal loan may be determined by your credit score and other factors such as your income and employment history.
One of the major benefits of a personal loan is that it can be used for almost anything; there are no restrictions on how you use the money. That means that if you have multiple debts with different interest rates, you can take out a personal loan and use it to consolidate those debts into one monthly payment at a lower interest rate. This can save you money over time because you’ll be paying less in interest charges.
Another benefit of personal loans is that they’re not secured by collateral such as your home or car; if you can’t repay the loan, the lender cannot seize your assets. This makes personal loans a good option if you don’t own any property or if your property is worth less than the amount of debt you’re trying to consolidate.
What is Debt Consolidation?
Debt consolidation is another option for consolidating multiple debts into one monthly payment. However, unlike personal loans, debt consolidation typically involves taking out a new loan that’s secured by collateral such as your home or car. That means that if you can’t repay the loan, the lender could foreclose on your home or repossess your car.
The advantage of debt consolidation over personal loans is that it usually results in a lower interest rate because the loan is secured by collateral. That means that over time, you’ll pay less in interest charges with debt consolidation than you would with a personal loan. However, the downside is that if you can’t repay the loan, you could lose your home or car; with a personal loan, the worst that could happen is that your credit score would take a hit (although even then, many lenders offer alternatives to foreclosure or repossession).
Debt consolidation also has some disadvantages compared to personal loans. For one thing, it’s usually only available if you own property such as a home or car; if you don’t own property or if your property isn’t worth enough to cover your outstanding debts, then debt consolidation isn’t an option for you (although there are some exceptions). Also, depending on the type of debt consolidation loan you choose, like a home equity line of credit, you may only be able to consolidate certain types of debt, usually unsecured debts like credit card debt.
Which Option is Best For You?
Both personal loans and debt consolidation have their pros and cons; which one is right for you depends on your individual circumstances. If you’re struggling with multiple debts each month and are looking for a way to consolidate those debts into one monthly payment at a lower interest rate, then a personal loan may be right for you. However, if you’re looking for a way to secure a lower interest rate by using collateral such as your home or car, then debt consolidation may be right for you. No matter which option you choose, be sure to do your homework before signing any loan documents.
Always remember: if you decide to consolidate your debts using either method, the goal should be to pay off your consolidated loan as quickly as possible so you can get out from under your debt once and for all.
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