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Personal Loans And Debt Consolidation Loans: Know The Difference
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Actually, both are the same but only have different names. A debt consolidation loan is simply a personal loan that is used to pay off other debts. Let’s differentiate further by going through the definitions of both.
Actually, both are the same but only have different names. A debt consolidation loan is simply a personal loan that is used to pay off other debts. Let’s differentiate further by going through the definitions of both.
What is a personal loan?
A personal loan can be used for any expenditure of your choice. They are paid back within 2-5 years and have a fixed interest rate.
The amount of loans approved usually varies from $1,000 – $20,000.
You can also get personal loans as large as $100,000 from some private lenders. These loans are unsecured.
This means you do not have to have any collateral to get these loans. You can spend it as you wish.
What is a debt consolidation loan?
A debt consolidation loan is a type of personal loan that places your high-interest loans under a single loan interest plan.
Now, here’s what you should know: assuming you have a lot of loans, each with their different interest rates, and then you take out a personal loan to settle all of them.
This automatically makes that personal loan a debt consolidation loan. It provides an easier way to settle your loans.
When do you take out a personal loan or debt consolidation loan?
Personal loans: Because personal loans do not require collateral does not mean you should take out these loans for any flimsy reason.
Even if you have a genuine reason, you should ensure you have a plan to pay the monthly installments.
If you have an emergency need, and you have a payment plan, then you’re good to go.
Debt Consolidation Loans: Debt consolidation loans are meant for when you have loans with high-interest rates. A debt consolidation loan is one of the best ways to settle these loans.
You’ll borrow an amount to pay off all your loans. This way, you have only one single loan to pay.
Do these loans depend on your credit score?
Both loans depend on your credit score. If you have a very good credit score, you’re bound to get the best deals on these loans.
However, if you do not want to destroy that perfect score, you should have a plan to pay these loans back.
If you do not have a good credit score, you can still get these loans. However, you should be ready to pay a high interest rate.
If you want to improve your credit score, here are a few ways to do this:
• Pay your loans when due and do not default on any payment
• Try to file for a hardship application if any situation comes up in which you’re unable to pay your loans (e.g., getting laid off at work)
• You can request your credit history from the credit reference agencies.
Loans are a good way to settle your bills. However, ensure you have a good plan to pay them back to avoid getting in a whirlwind of debts.
