How To Use Personal Loans to Lower Payments and Pay Off Debt

By Shiv Nanda,financial analyst

Don't wait for a miracle to dispel the dark clouds of debt gathering over your head. Take action by exploring your options, one of which may be a personal loan.


Some people oppose all debt, but a personal loan is not always a bad idea depending what you're going to do with it and the rates and terms. A personal loan can help you get debt payments to a manageable level - pay off your credit card debt, lower your interest payments and repair your credit. But you have to be careful so it doesn't delay your journey to financial freedom.

Let's look at how a personal loan could help you get your finances on track.

1. Rebuild your credit

Applying and being approved for a personal loan may lower your credit score initially, but you can improve it by consistently making on-time payments.

2. Consolidate your debts

When you roll multiple high-interest loans into one lower-interest personal loan, it means that you are consolidating your debts. Here's how that can help:

  • Pay off your emergency bills or prevent overdue bills from going to collection
  • Pay your taxes on time
  • Plan for unexpected expenses, renovate a home, purchase a vehicle, etc.
  • You have an option of converting repayment into flexible EMIs
  • Get a lower interest rate than your existing debts, saving money over the long term
  • Manage just one payment, which will simplify things for you

What a personal loan does (and does not do)

Now that we know what benefits a personal loan offers, let’s have a look at what it can or cannot do for you.

  1. Personal loans help you consolidate your debt. You’ll just have one account to manage. If you use your personal loan the right way, you’ll be able to save money and improve your creditworthiness.
  2. Exchange open-ended credit card debt for fixed-term loan. Credit cards are a personal line of credit that is open-ended. There are no fixed deadlines to fully pay your credit balance as long as you are paying the minimum amount due. You can drag your credit card balance for as long as you want - years or decades - by just paying the monthly minimum due. This is a trap. As the interest grows, your debt will look like a mountain and your budget will feel like a shovel. Using the personal loan proceeds to retire the credit card debt will put an end date on that debt since the personal loan has a fixed term.
  3. Personal loans help improve your credit score. Having a varied mixture of credit, such as installment loans (mortgage, car) and revolving credit (credit card) can improve your credit score, but you need to have a good repayment history. Types of credit accounts for about 10% of your FICO score.

Things to consider in a personal loan

Whatever your reasons for considering a personal loan, think it through. Here are some things to consider before applying:

  • Do I meet the requirement to qualify for a personal loan? The basic requirements are typically some personal information so the lender can identify you, your income, debts and credit score.
  • What is the personal loan for? There are different types of loans for different needs. It’s important to choose a loan that suits your needs and intent.
  • What are the interest rates? Choose a personal loan that offers you the lowest possible interest rate. You can then focus on paying off the money you borrowed rather than worrying about the extra interest.
  • What are the fees associated with a personal loan? Loans can have a range of fees, such as origination fee, early exit, servicing fee, insurance, early repayment, withdrawal fees, etc. Ensure that you spend time considering these fees to decide on the type and term of the loan to avoid unnecessary costs.
  • What is the term of the loan? The longer the duration of the loan, the lower are your monthly repayments, but the more interest you are likely to pay on the loan.
  • How do you plan to pay it off? It’s important that you plan well in advance how you intend to pay your loan off. This will help you choose the right type of personal loan.
  • What is the process and documentation? You can choose to apply for personal loans through online lending platforms or a local lender you trust, such as a credit union.

Final tips

  • Do your research. Different banks offer competitive loan rates and varying repayment terms.
  • Stick to a budget. Compare your income against your expenses to derive a realistic monthly payment towards your loan’s monthly payments.
A personal loan isn’t for everyone. If you want the personal loan to help you get rid of debt, you need to be ready to take control of your financial well-being.

About the author

Shiv Nanda is a financial analyst who currently lives in Bangalore and works with MoneyTap, India’s first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life's mission to help and educate people on various financial topics.

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Written on October 19, 2018
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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