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Why Using A Personal Loan For Debt Consolidation May Not Be the Best Choice

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American consumer debt reportedly exceeds $14 trillion, and it seems many people accumulate more — not less — as they get older. Recent data points to a troubling trend that often puts hard-working people in a difficult financial position. Even financially responsible people in these age groups reportedly take on sometimes burdensome debt and struggle to get relief.

  • Generation Z: $9,593 average debt
  • Millennials: $78,396 average debt
  • Generation X: $135,841 in average debt
  • Baby Boomers: $96,984 in average debt

When working people find themselves in debt, personal loans seem like a logical way to bring it all together into one tidy monthly payment. But to leverage this financial strategy effectively, it’s essential to know how debt consolidation can help.


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How A Personal Loan Can Help With Debt Consolidation


Debt consolidation is the process of paying off multiple balances with a lump-sum of money, in some cases, a personal loan. The conventional wisdom is that things like credit cards typically have high-interest rates that keep accumulating. Having multiple outstanding loan products can also weigh consumers down by draining their resources. These numerous monthly payments can exhaust resources and negatively impact credit scores.

A smartly orchestrated debt consolidation plan can lower monthly bill payments and creates a single, manageable amount. Ideally, once the personal loan is paid off, the consumer should be debt-free. In a perfect world, that’s the high-water mark of debt consolidation. But sometimes, well-meaning people veer away from their plan and end up worse off financially.


Personal Loans For Debt Consolidation May Not Be the Best Choice When...


It’s not uncommon for people who are struggling financially to rush into what seems like an easy solution. Taking out a personal loan for the purpose of debt consolidation and relief often fits that bill. If you are considering this long-term debt relief strategy, it may be worthwhile to take some personal inventory. Ask yourself, how did I get into debt in the first place? If the answer is spending more than you earn, here are reasons your debt consolidation plan might fail.


  • High-Interest Personal Loan: If the interest rate cannot reasonably result in paying down the principal in a timely fashion, the personal loan might be counterproductive.
  • Length of Loan: Personal loans typically have terms of 4 years. Those that exceed those parameters may leave you at risk of unexpected expenses or a financial shortfall.
  • Monthly Payments: It’s important to keep in mind that you are experiencing a financial strain based on spending that exceeds your income. If a personal loan doesn’t help you pay on time and live comfortably, little has changed.

When well-intentioned people employ a personal loan as a consolidation and relief solution without success, it’s usually because they begin taking on new debt. To take advantage of a long-term debt consolidation strategy, it’s imperative to take proactive steps.


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How To Ensure A Personal Loan Will Be Successful For Debt Consolidation


Completing a personal loan application should not be a knee-jerk reaction to feeling financially overwhelmed. You must formulate a plan. Begin by researching the available products offered by your credit union. Here are three things to consider when planning for success.

1: Prior To Getting A Personal Loan, You Must Have A Plan To Pay Off Debt

Planning is job one, two and three, when considering debt consolidation and relief. The personal loan must cover all of the outstanding consumer debt you have accumulated, with some minor exceptions. Take time to do the math on your monthly expenses so you can be confident you can cover everything with money left over. Need some help planning? Use Peach State’s Personal Debt Consolidation Calculator!

2. Candidates for Personal Loans Must Have Moderate, Not Massive Debt

If you are swimming in debt, a personal loan might not be sufficient for your financial needs. Personal loans are generally for people with moderate debt spread across many accounts. If your debt can be managed as a single monthly payment, a personal loan might be the best solution. If on the other hand you have a lot of debt, you may need to seek financial counseling to help you figure out how best to pay it off. Peach State offers this as a free service to our members from our friends at BALANCE Financial Fitness.

3. A Personal Loan Will Only Help If You Create New Habits

Taking a personal inventory includes thinking through your spending habits. The fact that a personal loan can make your financial life better is determined by whether or not you stop overspending. A successful long-term debt relief plan requires borrowers to rein in bad habits. Many succeed by crafting a monthly budget and sticking to it. Check out some helpful resources that BALANCE has to offer.


couple reviewing bills


In Over Your Head? How to Get Help


If you rank among the groups of people who continuously struggle with rising debt, it’s time to take control of your financial health and wellbeing. There are personal loans available that offer reasonable interest rates based on credit scores that can help you get back on track. Contact Peach State today to see what solution may be best for your personal financial situation.

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