Currently, several loans can get you through a challenging personal finance situation. However, personal loans are highly popular among those. Conversely, debt consolidation loans combine all your debts in a single loan, simplifying your personal finances.
In this article, expert credit advisers explain a personal loan vs debt consolidation loan. We explore their fundamentals, pros, and cons. Finally, we guide you to your suitable loan option. Also, is a debt consolidation loan the same as a personal loan?
What is a Personal Loan
A personal loan is also known as an unsecured or signature loan. This loan allows you to meet your needs like home repair, car repair, travel, wedding, and home appliance purchases. What differentiates a personal loan from others, like mortgages, home equity loans, etc? It is the absence of a collateral requirement. How long does it take to get approved for a personal loan?
How Does a Personal Loan Work
Unlike other loans where you must bond your assets as security, personal loans don’t demand collateral. Instead, your credit score, history, and income are crucial in securing one. The lenders rely primarily on your credit history and income for providing approval.
After you submit your personal loan application, the lender runs a hard credit check to evaluate your application. They approve your loan application based on your eligibility. Then, they transfer the fund to your account, or you receive a cheque. Finally, you can meet your financial needs.
Generally, a personal loan’s APR ranges from 7.99% to 35.99%. It depends on your credit score and your lender’s policy. The respective loan term ranges from 24 months to 60 months. Moreover, learn the duration of a personal loan.
Perks and Drawbacks of a Personal Loan
You must consider The following advantages and disadvantages of a personal. Moreover, learn the duration of a personal loan.
Advantages of a Personal Loan
- You receive a lump sum amount that you can use for one or multiple purposes.
- Most lenders process personal loan applications very fast. Its processing time is less than a mortgage or home equity loan.
- Using a personal loan is highly flexible; it depends on your needs and wishes.
- The easy-to-pay monthly payment option helps you to build your credit score.
- You can get a maximum of $100,000 as a personal loan.
- This loan is cheaper than the credit cards. Its average APR is 18.77%, which is more beneficial than credit cards, with an average APR of 20.78%.
- If you take the fixed rate personal loan, you will be able to manage your monthly expenses easily as you need to make a fixed amount as payment per month.
- Its application process is easy and very straightforward.
Disadvantages of a Personal Loan
- You need an excellent credit score for the lowest interest rate and terms.
- There are late payments and pre-payment penalties.
- Almost every personal loan comes with a 5%-10% origination fee.
What is a Debt Consolidation Loan
You are going through some hectic tasks if you have two or more loans. You are required to calculate each month’s payment separately, maintain the separate deadlines, etc. You can easily simplify your finances by taking a debt consolidation loan. Plus, can you use debt consolidation for personal loans?
How Does a Debt Consolidation Loan Work
Here, you apply for a business, personal, or balance transfer credit card to consolidate all your debt into one. In the process, you apply to the selected lender with all the required documents, including detailed documents of all your debts. Upon receiving your application, the lender runs a hard credit check and evaluates the financial documents.
They approve the loan application if you are eligible for the debt consolidation loan. Depending on the lender’s policy, the amount can be directly transferred to the initial lenders or your bank account. Finally, you end up with only one loan and its monthly payment. Moreover, you can identify the best way to consolidate debt without hurting credit.
Advantages and Disadvantages of a Debt Consolidation Loan
The following are the must-consider advantages and disadvantages of a debt consolidation loan.
Advantages of a Debt Consolidation Loan
- A debt consolidation offers greater convenience as you need to pay only one monthly payment.
- You have to pay a lower amount than the monthly payment. It means you have more money in hand to meet other needs.
- If you have an excellent credit score, you can secure a debt consolidation loan with a very low interest rate. For instance, if you consolidate your debts using a balance transfer credit card, you must pay a 0% APR for up to 12 months.
Disadvantages of a Debt Consolidation Loan
- A debt consolidation eventually feeds the overspending mindset. For example, if you start using credit cards after debt consolidation, you will go deeper into the debts.
- You need a good credit score, a history, and a solid income source to get a favourable interest rate.
- There are origination fees applicable.
- You risk your assets if you are going for any secured debt consolidation.
In-Depth Discussion on Personal Loan vs Debt Consolidation Loan
To distinguish between a personal loan and a debt consolidation loan, the first thing to mention is that you can use a personal loan for debt consolidation purposes. But, there are legal obligations to use a debt consolidation loan amount for other purposes like purchasing home appliances or making travel. Can I still use my credit card after debt consolidation?
Secondly, having multiple loans makes having a healthy credit score very tough. Then, the lender can seek collateral from your end. On the other hand, the most popular form of a personal loan is an unsecured personal loan. Above 90% of personal loan seekers go for this option only. Only financial marketplace business people or persons in great need go for secured personal loans. Third, a debt consolidation’s repayment terms are higher than a personal loan’s. Plus, how long does a debt consolidation stay on your credit?