Using a personal loan to pay off debt

Owing a lot of money on credit cards and other bills can be stressful. Fortunately, there are ways to manage your debt and make it easier to repay. One option is to consolidate your debt with a personal loan. This article will explain how the process works and help you decide if you want to try it.

Here’s what we’re going to cover:

• How do I use a personal loan to pay off debt?
• Benefits of paying off debt with a personal loan
• Drawbacks of paying off debt with a personal loan
• Oportun: Affordable lending options designed with you in mind

How do I use a personal loan to pay off debt?

Personal loans can be used for most personal needs, including paying off other debt. This is called debt consolidation and people typically do it to simplify their finances or save money.

How does it work? First, you look for a loan with lower interest and fees than what you currently pay on your debts. If you can get approved for a loan like this, you then use the loan funds to pay off your credit card bills, payday loans, and other outstanding debts. If your personal loan is large enough to pay off all your other debts, you’ll only have to make payment to a single lender and follow one set of repayment terms.

Consolidating your debt with a personal loan doesn’t make your debt disappear. You still have to pay back the money you borrowed. What you are doing is combining all your existing debts into one account under one lender, to make repayment simpler.

Benefits of paying off debt with a personal loan

The big advantage to consolidating your debt through a personal loan is that you might end up owing less money in interest and fees. This could help you get out of debt faster.

You may also find that it’s easier to follow one repayment schedule rather than several. And if you take out a loan with a fixed interest rate, the payment amount will be the same each time. You know exactly how much you have to budget for.

Further, making your loan payments on time and in full could also help improve your credit score.

Drawbacks of paying off debt with a personal loan

It may be difficult to obtain a high-quality personal loan if you carry too much debt. Many lenders look at a debt-to-income ratio when determining whether or not to make the loan to an applicant. Without realizing that the loan purpose is to pay off other debts, they may interpret your loan application as adding more debt to an already strained budget. It is possible that you may not be approved for a loan size large enough to cover all your other debts, or you may even be denied based on the amount of debt you carry.

Before you decide to pay off debt with a personal loan, look carefully at the interest rates, fees, and repayment structure. Debt consolidation through a personal loan makes sense if you can save money over the life of the loan, or if simplifying repayment means better peace of mind or that you’ll be more likely to make payments on time.

There are several risks if you don’t keep up with your loan payments. Missing a payment can lower your credit score. You could also end up owing late fees or penalties. And if you’ve put up collateral for a secured loan, you risk losing that property.

Here’s one more thing to consider. If you don’t already have one, try setting a budget to help you manage your income and expenses. If you follow it, you could end up owing less and having more money in the bank.

Oportun: Affordable lending options designed with you in mind

Now that you understand how to use a personal loan to consolidate debt, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:

• Personal loans
• Secured personal loans
• Saving
• And more!

Sources

Experian. Should I get a personal loan to pay off my credit card? 

Forbes Advisor. Using a personal loan to pay off credit card debt 

Bankrate. Should you get a personal loan to pay off credit card debt?