Consolidation Debt Loan vs. Personal Loan

You may elect either a consolidation debt loan or a personal loan to assist you in paying off many lenders and getting out from under your debt burden. In each case, you will be entering loan modification as well as taking on new debt. The primary difference in the two options will be the structure of your new loan.

Load Modification

Loan modification includes refinancing, prepayment, settlement or consolidation. When you consolidate, you are actually engaging in each of these processes. You are prepaying your loans, hopefully at a low lump-sum settlement. You are taking a new loan to pay off all of existing loans, which is consolidation. Your new loan should be at a lower interest rate, which includes the refinancing step of the process. Modifying any loan comes with explicit consequences. These consequences include fees and penalties as well as a drop in credit score. You will experience these consequences whether you take a personal loan or a consolidation loan.

Assuming a New Loan

Your new loan will be a wholly new source of debt. You will pay one monthly payment to the new lender. The goal is to make this payment less than the sum of your previous loan payments. This payment is cheaper through both the settlement you achieved and the lower monthly interest rates. In some cases, you may be willing to take on a higher monthly payment on your new loan if your ultimate goal is to pay down your debt very quickly. If you can afford the extra expense, you will save money in the long run.

Debt Consolidation Structure

When you take a debt consolidation loan, you will reach a few key advantages. First, the consolidation company will often have experience or contacts in settling existing debt on your behalf. Further, consolidation loans may come with protections from previous lenders. This means you may find lenders can no longer contact you once your consolidation company has engaged them to settle the debt. Your consolidation loan will usually have a high interest rate because it is a high risk loan. Another disadvantage is the way you will cede some control of the process in order to work with a consolidation agency.

Personal Loan Structure

A personal loan can be used for any expense. You do not typically provide collateral or explicit loan terms when you sign a personal loan contract. This flexibility is appealing to some borrowers. Additionally, you will have the option of taking a higher loan than you need in order to cover new expenses. Personal loans are very high-risk, meaning they will be high cost. However, they will boost your credit score significantly when paid off in full. Since you will not receive the advice or assistance of the consolidation company, it is important you have the comfort and discipline to get the job done yourself when using a personal loan. 


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