There are many different kinds of debt that people might have. Debt that is backed by some sort of collateral is called secured debt. Examples of this might be a car loan or a home mortgage. Your home mortgage is backed by your home — if you stop paying your mortgage, the bank may take your home. Similarly, your auto lender may repossess your car if you stop paying on your auto loan.
Unsecured debt is debt that you are liable to pay and you have agreed to pay. Examples of this are credit cards, student loans, or personal loans. If you stop paying on your credit card, the bank can cancel your card and try to get their money back, but they can’t take your home or throw you in jail.
What is a personal loan?
A personal loan is one type of unsecured loan that is available to people who qualify. In some ways, a personal loan is similar to a credit card in that both are unsecured loans. One big difference is that with a personal loan, the amount of the loan, the interest rate and the term of the loan are usually set upfront. Generally, you will receive a lump sum upfront, and then have the same monthly payment until the loan is paid back, usually between 12 to 60 months. The terms and interest rates on personal loans vary on a number of factors. These include your credit score, the amount of the loan, and the length of the personal loan.
How you can use a personal loan to consolidate debt
If you have a lot of unsecured debt with high-interest rates, it may make sense to use a personal loan to consolidate that debt. This could be outstanding credit card balances, a used car loan or unpaid medical or other debts. Generally, the interest rates on these types of loans is higher than what you would get with a personal loan.
Personal loan rates can be as low as 5.99% or even lower. It depends on your credit profile and the length of the loan. If you have a significant amount of credit card or other debt with interest rates of 18-24% or higher, you can see how you would be able to save a significant amount of money by consolidating your debt into a personal loan with a much lower interest rate. You can also simplify your life by having just one monthly debt payment instead of having to stay on top of multiple different payment due dates and amounts.
Pro Tip: If you have a loan or credit card, you can check out Mint’s free Loan Repayment Calculator to determine interest amounts or if a loan or credit card is right for you before applying.
How to choose a personal loan
There are a couple of different factors that can help you choose the right personal loan. First, you’ll want to compare different lenders to see what types of personal loans they might offer. You can look at our list of the best personal loan lenders as a place to start. Generally, a longer-term and larger loan amount will lead to lower interest rates. You should also be aware of any collateral requirements or prepayment penalties if you pay off your personal loan early.
How the Mint App can help
Using the Mint App can help you consolidate your debt and track your payments. Whether you have multiple different loan payments or just a single consolidated payment, the Mint app can track your payment dates and amounts. That will make sure that you never miss a payment. The Mint app can also help you see the interest rates and balances on your different debts. That can help you decide whether the debt snowball or debt avalanche method of repaying your debts makes the most sense for you.
The Bottom Line
A personal loan is unsecured and not usually backed by any form of collateral other than your promise to repay. Unlike a credit card, where you have access to a revolving amount of credit up to your total credit line, with a personal loan you get a fixed amount of money upfront. You then pay it back with periodic equal monthly payments until the loan is completely paid back.
Interest rates on personal loans are usually lower than rates on credit cards or other types of unsecured debt. So if you have a significant amount of high-interest debt and are ready to start paying it off, using a personal loan to consolidate debt may make sense for you. That way you can consolidate all of your credit cards and other high-interest debts into one monthly payment. Hopefully, at a much lower interest rate.