As well as providing a financial boost for purchases and projects, personal loans can be used to consolidate your debts. If you have multiple debts such as credit cards and other loans, consolidating them into a single monthly payment can have several advantages. Here we look at the three main benefits and what to bear in mind when you’re thinking about consolidating your debts with a personal loan.
Streamline your finances
A debt consolidation loan lets you switch all your existing borrowing on to one loan, so you only need to make one repayment each month. This can simplify and streamline your finances, helping you to keep track of what you owe.
Reduce your monthly repayments
You may be able to save money with a debt consolidation loan by finding one that charges a lower APR than you’re currently paying. This works particularly well if you have quite a few outstanding debts gathering interest and can reduce your overall monthly repayments.
Improve your credit score
It’s easier to make one repayment every month, and doing so will improve your credit score.
Consolidating debts into a personal loan can also improve your credit by lowering your credit utilisation ratio (how much of your available credit you use), which accounts for 30% of your overall credit score, and improving your credit mix.
Although consolidating your debts with a personal loan can simplify the debt repayment process and save you money, it won’t make your debts disappear. If you miss a repayment, it will impact your credit score and can lead to even more debt if you use newly available space on credit cards or extend the terms of your loan. You should also bear in mind that you will have to contact your existing creditors to transfer the balance of your loans (unless your lender offers this service), and this can sometimes incur a fee.
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