Can You Use Personal Loans for Debt Consolidation?

Cash Advance

Cash advances are only available for people with credit cards. First, you set up a credit card PIN, then you can take cash out at an ATM, depending on your available line of credit. Essentially, it’s like a small, short-term loan from your card issuer. However, buyer beware: Cash advances are subject to very high APRs and fees (which accrue instantly), with secured credit cards on the higher end of the fee scale.

HELOC (Home Equity Line of Credit)

HELOCs are similar to a home equity loan, which is essentially a secured loan using your home as collateral. HELOCs also use your house as collateral, but instead of getting a lump sum upfront, you’re allowed to borrow as much as you need (up to the approved credit limit) any time you find yourself stuck in a financial emergency.

HELOCs feature a variable interest rate and ounts of money from time to time. Like a standard home equity loan, you could lose your house if you don’t comply with the repayment terms. HELOCs require an extensive application process, including the appraisal of your house, in most cases.

Car Loans

Generally, you’ll find two different types of car loans for people with low credit ratings. One is a standard car loan for bad credit, and another is a car title loan.

Bad-credit auto loans usually have a higher interest rate, which means you could pay more money out-of-pocket. However, you can use this loan to build up your credit. Then look into refinancing for a lower rate in the future.

Car title loans are similar to payday loans. You’ll pay a very high APR, and you’ll have to hand over your car title to borrow money against for a short-term period, usually 30 days. Of course, you’ll almost always have to pay an origination fee to borrow the money in the first place. If you miss payments, you risk losing your vehicle.

Personal Loans vs. Payday Loans

The temptation of applying for payday loans can be too great to resist for some people, but they’re hands-down one of the most expensive personal loans. While you may experience difficulty qualifying for an unsecured personal loan, accepting a payday loan offer can be disastrous and put you in even more debt. With APRs in the hundreds and a high origination fee to boot, these loans usually feature outrageous terms, like a 400% APR on a meager $100 loan.

While personal loans have stricter eligibility requirements, they offer a much more affordable way to borrow money (without the sky-high APR). In addition, many credit unions offer payday alternative loans with a maximum rate of 28% and the option for a higher loan amount, too.

Yes, you can easily apply for a personal loan to consolidate debt. Though many people call them by the same name, a consolidation loan is just a personal loan that you use to pay off your debt. Instead of having multiple payments with different terms and APRs, a consolidation loan provides a way to merge all your debt into one easy monthly payment.

  • Possible faster debt payoff
  • Lower APRs
  • One manageable monthly payment
  • Easier budgeting
  • Opportunity to build your credit
  • Reduction of your credit usage ratio

While consolidating all of your debt into one payment does provide benefits, as with most loans for people with poor credit, there are some tradeoffs and downsides.

For one, personal loans usually offer lower APRs, but the lower your credit score, the lower your chances of scoring a reasonable rate on a consolidation loan. Many companies also charge origination, late payment, and prepayment fees. Consolidating your debt can provide a handy solution, but it rarely addresses the problem in the first place, which is usually reckless spending or poor financial habits.

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