Being saddled with overwhelming debt is stressful. Two common debt relief options are debt consolidation and personal loans, but they work quite differently. Understanding the key variations and potential benefits helps determine which fits your financial situation better.
What is Debt Consolidation?
Debt consolidation combines multiple high-interest debts like credit cards and loans into a single new loan with a lower interest rate. This consolidates repayments into one monthly instalment.
Banks, credit counsellors and other lenders offer debt consolidation loans. The loan amount covers your total owed debts which are then paid off and closed. This simplifies repayment and ideally reduces the total interest paid.
What is a Personal Loan?
A personal loan provides a lump sum of cash which you repay in monthly instalments over a period up to a few years. The loan amount can be used for any personal expenses including consolidating existing debts.
Interest rates for personal loans are generally lower than credit cards but higher than secured loans. The application and approval process considers your income, credit score and existing debts. The borrowed sum is directly disbursed for your usage.
Key Differences Between the Two
While both can assist with debt burdens, there are several key differences
– Purpose – Debt consolidation specifically targets existing debts while personal loans are for general expenses.
– Loan amount – Debt consolidation loans cover total owed debts, personal loans may approve a lower sum.
– Interest rates – Debt consolidation loans have lower rates as existing debts are closed first.
– Collateral – Personal loans may require collateral like property. Debt consolidation loans are often unsecured.
– Flexibility – Borrowed cash from personal loans provides more flexibility compared to closing debts via consolidation.
Benefits of Debt Consolidation
Consolidating multiple debts into one with better repayment terms has advantages like:
– Lower interest rate, saving on total interest paid
– Simplified single monthly repayment
– May provide access to more cash flow by lowering instalments
– Helps avoid missing repayments and damaging credit score
– Convenience of dealing with just one lender
Benefits of a Personal Loa
Taking a personal loan to pay off debts or handle big expenses also has benefits:
– Provides instant access to lump sum cash injection
– May get approved for higher loan amounts more easily
– Flexibility in using the cash any way you want
– Can take out another loan after paying off the personal loan
– Potentially faster approval than debt consolidation application
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Which is Better?
The suitability of debt consolidation versus a personal loan depends on your specific situation. Consolidation makes sense if you can secure significantly lower interest rates, while a personal loan offers flexible cash. Seek financial advice to ensure the option chosen best supports your debt freedom journey.