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Loans can help you cover expenses, make a big purchase and even consolidate existing debt – but what type of loan makes the most sense and when?
When deciding which type of debt, a personal loan may be helpful for consolidating that debt into a single payment, ideally at a lower interest rate. Some lenders offer “debt consolidation loans,” but these are just personal loans. Let’s look at the pros and benefits of personal loans, and how they can be used for debt consolidation.
Debt consolidation means rolling multiple loans or credit cards into one loan. It can allow you to simplify payments and manage your debt more effectively.
A debt consolidation loan is a type of personal loan – it can let you pay off multiple debts. It’s used for unsecured debts – such as credit cards or personal loans – in a single loan. But if you qualify for a debt consolidation loan, you can use the funds to pay off your creditors.
If you have good credit and can qualify for a rate that’s better than the interest rates on your credit cards with outstanding balances, you can use the funds from a debt consolidation loan to pay off all the balances. Then the monthly payments are replaced with just one payment on your new loan.
It can make sense to get a debt consolidation loan if:
Loans aren’t the only way to manage debt. Other options include balance transfer credit cards and debt repayment strategies.
A balance transfer lets you move an outstanding credit card loan balance to a new credit card. While cardholders may pay a balance transfer fee, they may also be able to get an introductory rate for a specified period. The interest rate may be lower for a few months to a year, and cardholders can use the opportunity to pay down debt. Any unpaid balance at the end of the offer term reverts to the card’s regular rate.
The debt snowball method focuses on reducing debt by tackling smaller and more manageable debts first. To start, list all your debts from smallest to largest. Make minimum payments on all debts except the smallest, which gets the largest payment you can afford. Once the smallest debt is paid off, move to the next smallest, and so on. This strategy helps with debt repayment momentum and motivation.
The debt avalanche method prioritizes paying off high-interest debt. Start by listing all your debts from highest to lowest interest rate. Make minimum payments on all debts except the one with the highest rate, which gets the largest payment you can afford. Once the highest-rate debt is paid off, move to the next highest, and so on. This strategy can help you save on interest and pay off debt faster.
The term “personal loan” is used to describe a category of loans you can use for a wide range of purposes, including bigger purchases and expenses, as well as debt consolidation. You can also use a personal loan to consolidate debt, even if it’s not explicitly marketed that way.
Unsecured personal loans are issued through banks, credit unions and online lenders. Rates, amounts and terms depend on the lender and your creditworthiness.
Most personal loans are installment loans, which means you’ll need to fit loan terms and rates into your budget and make monthly payments. If approved, you’ll receive the funds by check or direct deposit. Borrowers usually must start making monthly payments as soon as the loan is disbursed.
There are a few times when personal loans can be useful, but they are typically best for situations where you need funds quickly to finance a big expense. Here are some situations in which a personal loan might make sense:
Although you can use a personal loan for just about anything, they might not be the best option for every situation. Here are some alternatives:
Credit cards can be a convenient way to make everyday purchases. You can use credit cards for larger expenses like car repairs, but you’ll be charged interest on outstanding balances after your payment due date (even if you’ve made the minimum payment). On-time payments and the right use can build credit and avoid accruing interest.
Similar to a credit card, a personal line of credit (LOC) is a revolving line of credit that lets you withdraw funds up to a certain amount. LOCs can make sense if you need ongoing access to funds or are unsure how much something – for example, a kitchen renovation – will cost.
The right loan for you depends on your financial needs and circumstances. If your goal is to combine multiple debts, getting a debt consolidation loan can help with debt repayment. If you need funds for other reasons, whether home improvements, car repairs, or a significant expense, a personal loan may be the better option. Both loans are considered personal loans and have similar requirements.
Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
