Personal loans can finance a variety of large expenses, from home repairs to medical bills to major purchases. But they can also serve another important purpose: simplifying your finances. Specifically, you can use a personal loan to consolidate multiple debts into one. Consolidation can streamline repayment by replacing several payments with a single, predictable monthly bill.
Let’s take a quick look at how you can use a personal loan to simplify debt payments, how debt consolidation works, and when consolidation could make sense for your situation.
Key Points
• A personal loan can simplify finances by consolidating multiple high-interest debts into a single, predictable monthly payment.
• Debt consolidation can streamline repayment by replacing multiple due dates, interest rates, and lenders with a single lender, rate, and payment.
• Personal loans for consolidation typically have fixed interest rates and set repayment terms.
• The decision to consolidate should weigh potential savings against possible fees and a longer repayment timeline.
• Simplification helps manage debt but doesn’t fix the root cause of overspending if that led to the debt problem.
What Does Financial Simplification Mean?
Financial simplification can make your financial obligations easier to track and maintain. It might involve strategies like:
• Consolidating multiple debts into a single loan
• Automating your payment so you can “set it and forget it”
• Aligning your bill due date with your paycheck
• Creating and following a budget each month
• Devising a straightforward debt repayment plan you can stick to
A debt simplification strategy won’t necessarily reduce how much you owe, but it can help you avoid missing payments and allow you to manage your debts more smoothly. The goal is to feel less overwhelmed so you can tackle repayment with a clear and effective strategy.
When your finances are easier to track, it’s simpler to plan ahead and stay consistent with your financial goals.
What Is a Personal Loan?
A personal loan is a type of financing that you can use for almost any purpose, including debt consolidation. It offers a lump-sum amount that you pay back on a predictable schedule over several years.
Most personal loans have fixed interest rates, so your monthly bills won’t change and you can estimate your borrowing costs upfront. Rates may start around 6% or 7% but typically won’t exceed 36%.
Your rate will primarily be based on your financial profile, especially your credit score and income. The most favorable loan rates typically go to those with the strongest credit score. Unlike home loans and auto loans, personal loans tend to be unsecured, meaning they don’t require collateral.
You can find personal loans from various lenders, including banks, credit unions, and online loan providers. Some lenders will pay off your creditors for you if you’re using a personal loan to consolidate debt.
Because personal loans have fixed rates and predictable monthly payments, they can be a useful way to simplify debt payments if you’re managing multiple debts.
Why Finances Become Complex
If you’re considering a personal loan as a debt simplification strategy, take a moment to understand how you got here. Finances can become complex over time as you open credit cards or take out loans. Tracking all your accounts can be stressful, especially if you’re juggling multiple lenders, interest rates, and payment schedules.
Multiple Lenders
When you owe money to several lenders, you’ll need to keep track of several different accounts and login information. For example, you might have:
• A daily-use credit card, a travel credit card, and a store credit card
• A buy-now, pay-later financing plan that you used for a major purchase
• A car loan
• Student loans from college or graduate school
Each lender likely has its own payment portal, billing cycle, repayment plan, and customer service process. It can be tough to keep everything organized and monitor all your balances and statements across several accounts.
Various Interest Rates
Your finances can also become complex when your lines of credit carry different interest rates. For instance, you might have one credit card with a high interest rate — the current average is 20.97% — and another with a 0% promotional rate that’s set to expire soon.
Credit cards also have variable interest rates that can fluctuate over time, making your borrowing costs unpredictable. Personal loans, on the other hand, usually have fixed rates that stay the same over the life of the loan.
Having a mix of rates and rate types can make it difficult to track how quickly your balances are growing or how long repayment will take. It may also require careful planning to decide which debt to prioritize first. Deciding between the snowball method and the avalanche method of debt payoff can be a brain-teaser. Consolidating debt with a personal loan lets you avoid the decision.
Different Payment Schedules
If you’re carrying multiple debts, you’re probably also paying bills on different days of the month. One credit card payment might be due on the 3rd, while another is due on the 15th and the third is due on the 25th.
When you’re juggling your rent or mortgage, utilities, and other bills, you may find yourself making payments throughout the entire month. It can be tough to track all these due dates, especially during a busy season of life.
Even if you use autopay, you need to make sure you have enough cash in your checking account at any given time to avoid overdrafts.
How Personal Loans Can Simplify Debt
Consolidating your debt with a personal loan is one way to simplify debt payments and introduce more predictability into your financial life.
Single Payment Structure
Debt consolidation lets you replace your current credit card balances with a single personal loan. Then you make one payment to a single loan servicer each month, rather than having to manage multiple payments. It can be a lot easier to budget for one payment per month rather than several spread out throughout the month. Plus, your lender may allow you to choose your payment date, so you could align it with your paycheck.
Fixed Repayment Amount
Your monthly payments on a personal loan typically stay the same month after month. Let’s say, for example, that you borrow a $10,000 personal loan at a 12% interest rate. On a five-year repayment term, you’d pay about $222 each month.
With credit cards, on the other hand, your minimum payments fluctuate based on your balance and interest charges. It can be hard to predict your monthly bills, whereas a personal loan gives you a consistent obligation month after month.
You can use a debt consolidation calculator to crunch the numbers and estimate your potential savings.
Predictable Payoff Timeline
You may also appreciate the predictability of a personal loan payment structure. Repayment terms vary, but often span one, three, five, or seven years, depending on the lender and your loan amount.
More details about how personal loans work: You’ll have a set term and a clear end date for your debt. You can also generally choose to make extra payments without penalty if you want to get out of debt faster.
With revolving credit cards, your balances can linger indefinitely if you’re only making minimum payments. Having a predictable payoff timeline can simplify debt repayment and make it easier to balance your other financial goals.
Recommended: Secured vs. Unsecured Personal Loans
When Simplification May Make Sense
Simplifying your debt with a personal loan isn’t always the right move, but it can be beneficial in some situations.
Busy Schedule
Between work, family, and other responsibilities, life can get hectic. When you have a busy schedule, you might put your credit card debt on the backburner or lose track of your various debt balances. Plus, you probably don’t want the headache of adding more obligations to your already long to-do list. When life feels busy, you may appreciate that simplifying your debt can reduce the amount of time and energy you spend managing your bills.
Major Life Transition
If you’re going through a major life transition, like moving or having a child, you may need to adjust your financial situation. During these times, simplifying your debt with a single repayment plan can help you stay organized while you adapt to your new life circumstances. You may also save money if you’re able to reduce your interest rate.
Managing Multiple Debts
Managing several outstanding debts is one of the common uses for personal loans. Combining them into a debt consolidation loan could streamline your financial system. You won’t have to track multiple balances, interest rates, and payment due dates. Instead, you can focus on making one payment on a defined repayment term. This clarity could help you stay motivated and consistent along your debt payoff journey.
Potential Downsides to Consider
As with any financial decision, there are both pros and cons to consider before applying for a debt consolidation loan. Some potential downsides include:
• Not qualifying for a lower interest rate: If you don’t qualify for a better interest rate, you could end up increasing your borrowing costs.
• Potential fees: Some lenders charge origination fees that may add up to 15% of your loan amount. Studying a loan’s annual percentage rate (APR) instead of just looking at its interest rate can help you compare the cost of different lenders’ offerings.
• Extending your repayment timeline: A long repayment timeline could mean more affordable monthly payments but higher long-term interest costs.
• Not addressing the root cause of your debt: Simplifying your debt won’t fix an overspending problem. If you’re prone to spending too much on your credit cards, you could end up with both a new loan and growing credit card balances.
The Takeaway
Consolidating debt with a personal loan can be a savvy way to simplify your finances if you’re dealing with multiple debts. By turning several payments into one monthly payment with a fixed interest rate, you can streamline your approach to debt repayment and may feel less stressed as a result. Keep in mind, however, that financial simplification alone won’t reduce your debt. You’ll still need to come up with a budget and plan for paying back your loan while avoiding getting into even more debt.
If consolidating debt with a personal loan makes sense for you, make sure to shop around and compare loans from multiple lenders. That way, you can find an offer with the best rates and terms that match your financial goals.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Does simplifying debt help your credit score?
Simplifying debt can indirectly help your credit score if it helps you avoid missing payments, as your payment history makes up 35% of your score. Consolidating credit card debt with a personal loan can also reduce your credit utilization, which could improve your credit score.
Is one payment always better?
Switching from managing multiple debts to a single payment can simplify your finances, but it’s not better in every situation. If your new consolidation loan has a higher interest rate or longer repayment term, it might cost you more in the long run.
Can debt simplification reduce financial stress?
A debt simplification strategy can reduce the mental load of juggling multiple debts and make it easier to stay on track with repayment. At the same time, you may also need to take other steps to reduce your financial stress, such as stabilizing your income or curbing an overspending habit.
What should I evaluate before consolidating?
Before consolidating your debt, compare the interest rate on the personal loan with the rates on your existing debts to confirm it would lead to savings. Consider any fees and the loan’s repayment term as you estimate your borrowing costs. Finally, consider whether consolidating will change your financial habits and prevent you from accumulating additional credit card debt in the future.
Photo credit: iStock/Marco VDM
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