Should You Use a Personal Loan to Pay Off Debt?

Introduction

Personal loans are a popular tool for debt consolidation, but is borrowing more money really the best way to get out of debt? In this article, we explore how personal loans work, when they can help and when they might create more problems.

What Is a Personal Loan?

A personal loan is an instalment loan with a fixed interest rate and repayment term. You borrow a set amount and pay it back in regular monthly instalments. Interest rates depend on your credit history and income. Some lenders market these loans for debt consolidation, touting them as a way to simplify your finances canada.ca ↗

Pros of Using a Personal Loan for Debt

Lower interest rate: If your credit is strong, a personal loan may offer a lower rate than credit cards, saving you money and helping you pay off debt faster canada.ca ↗

Fixed repayment schedule: A set term makes it clear when you'll be debt-free, and your monthly payment doesn't change.

Simplified payments: Combining multiple debts into one payment reduces the chance of missing due dates.

Improved credit mix: Diversifying your credit can boost your score if you make payments on time canada.ca ↗

Cons and Risks to Consider

Fees and costs: Origination fees, prepayment penalties and insurance add to the cost. Always read the fine print.

More debt: Taking out a loan without changing spending habits can lead to more debt. The Government of Canada cautions that consolidating debt may increase your total cost if you extend the repayment period or continue to use credit cards canada.ca ↗

Interest rate qualification: If your credit score is low, you may not qualify for a lower rate, or may be offered a high-cost loan.

Collateral: Some personal loans are secured against your car or home; missed payments put these assets at risk.

When a Personal Loan Makes Sense

A personal loan may be a good option if you have a stable income, a strong credit score, and high-interest credit card debt. Make sure the loan's interest rate is lower than your existing debt and that the payment fits comfortably in your budget. Use a loan repayment calculator and choose a term that balances monthly affordability with overall cost canada.ca ↗ Commit to not using your credit cards until the loan is paid off. For step-by-step repayment methods, see [Snowball vs. Avalanche Method](cleanslatehub.ca ↗) and [How to Get Out of Debt on a Low Income](cleanslatehub.ca ↗).

Alternatives to Personal Loans

If a personal loan isn't right for you, consider other debt relief options:

• Consolidation loan or line of credit: Banks and credit unions offer loans or lines of credit specifically for consolidation canada.ca ↗
• Balance transfer credit card: Promotional % interest rates can buy time if you pay off the balance before the rate increases canada.ca ↗
• Debt management plan: Non-profit credit counselling agencies negotiate lower interest rates and consolidate payments canada.ca ↗
• Consumer proposal or bankruptcy: These legal solutions reduce or erase debt but have significant consequences canada.ca ↗ Learn more in [Debt Consolidation vs. Debt Settlement](cleanslatehub.ca ↗).

Conclusion

A personal loan can be a valuable tool for getting out of debt - but only if you qualify for a lower interest rate, have a budget that ensures timely repayment and avoid accumulating new debt. Carefully compare options, read the terms and consider alternatives. If you're overwhelmed, speak with a credit counsellor or Licensed Insolvency Trustee for unbiased advice.