If you have a decent amount of debt, and you're making monthly payments to several different companies, you can often lower your monthly out-of-pocket expenses by consolidating your debt. When you consolidate your debt, you obtain a loan to cover the total amount of debt you have, and then, use the money you receive from your loan to pay off the debt you've accumulated. This way, you're only making one monthly payment, which is typically lower than the amount of the combined payments you were previously making each month. However, in order for the process to work correctly, you need the right kind of loan. Discover whether or not a personal loan is the right option for you.

Interest Rates

If you have good credit, chances are you can obtain a personal loan with a decent interest rate. This works out well because the loan will be unsecured, and if you get a fixed interest rate, the interest rate won't change while you're paying the loan off.

However, if your credit score is lower, you might be able to get a lower interest rate by using a home equity line of credit to pay off your debt. It typically carries a lower interest rate than a personal loan, because the loan is secured with your home. Alternatively, you could use a credit card that's offering a zero percent interest promotion to pay off your debt. However, keep in mind you have to pay the credit card off completely before the promotion ends. Otherwise, you'll be charged back interest on the total amount of debt you originally charged.

Prepayment Penalties

Personal loans are a good option for debt consolidation. However, in addition to securing a good interest rate, you need to read the terms of the loan to make sure there isn't a prepayment penalty. When a financial institution approves a loan application, it estimates that amount of money that will be made from the interest on the loan. However, if you pay the loan off too soon, it limits the amount of profit made by the bank. Therefore, many financial institutions include a prepayment penalty in the terms of the loan that indicates you're responsible for paying a set fee of the loan by a specific date. So, if you plan to pay the loan off quickly, makes sure you get a personal loan without a prepayment penalty.

Accidental Overdrafts

Many personal loans are linked directly to your bank account so that the financial institution can withdraw the money for your payment automatically each month. While this feature can be convenient, if you aren't careful, it could result in accidental overdraft fees being charged to your account. So, if your account doesn't have overdraft protection, try to obtain a personal loan that isn't directly linked to your bank account just to be safe.

Ultimately, there's nothing wrong with obtaining a personal loan to consolidate your debt. In fact, because the loan is unsecured, it can actually be beneficial to you. Before you decide against obtaining a personal loan to consolidate your debt, talk to a professional banker, like those at Union State Bank, to determine what type of debt consolidation options are available to you and choose the one that fits your needs best.