3 essential questions to answer before you use a personal loan for debt consolidation

Dealing with expensive, high-interest debt could have a surprising silver lining: an opportunity to learn from the past and plan for the future with a personal loan for debt consolidation. 

A personal loan is a type of loan from a bank, credit union, or a private lender. Personal loans are nearly always unsecured, meaning you don't have to provide anything of value to the lender as a guarantee. 

Taking out a personal loan to consolidate your more costly debts could help you reach your financial goals faster. Before you do, ask yourself these three essential questions.  

1. Will I come out ahead financially?

Personal loans are taken out for all kinds of reasons, from home improvement projects to wedding expenses. One of the most popular uses of a personal loan is to consolidate existing debt. Here's how a debt consolidation loan works:

• You apply for a new loan that has better terms than your existing debts. 

• If you’re approved, you use the loan funds to pay your other creditors. 

• You make monthly payments until the new loan is repaid in full.

Ideally, the annual percentage rate (APR) you qualify for on the personal loan is lower than the rate you pay on the debts you want to pay off. 

Here’s the difference between paying off $10,000 in credit card debt and using a personal loan to consolidate that same amount. The lower APR on the personal loan results in significant interest savings.

Personal loans come at many different interest rates, largely depending on your credit standing. If you’ve got excellent credit, you might qualify for a lender’s lowest rate. 

Compare this $15,000 credit card balance at 21% to a $15,000 personal loan at 9%:

These examples use simple interest. Not all lenders use simple interest.

Not everyone can qualify for a lender’s lowest advertised rate. But if you qualify for a rate that’s lower than what you currently pay, you could pay less in interest.

Read more: Personal loan vs. credit card debt

2. Can I commit?

Here's where you get to do an honest assessment of your debt situation. Using a personal loan to pay down existing debt works best if you don't take on additional debt. If your debt was caused by a financial emergency but you're otherwise good at living within your budget, you might already be a great candidate for debt consolidation.

If, however, your debt was caused by overspending, it’s important to create a plan to avoid new debt before you take on a new consolidation loan. If you pay off your credit cards and then rack up more debt while you’re paying off the loan, your financial situation could get worse.

If you can commit to avoiding new debt, several really great things can happen. Here are a few of them:

• You'll strengthen your ability to live within a household budget and only spend the money you have available.

• You'll gain self-confidence as you realize that you control your budget, not the other way around.

• You'll know precisely when the new loan is scheduled to be paid off, and you can begin to plan your financial future with confidence in the direction you're headed. 

Read more: How and why to consolidate credit card debt

3. What got me here?

Know that you're not alone. Millions (and millions) of us have found ourselves saddled with debt that seemed as though it would never be paid off. And many of us have opted to consolidate that debt as part of a payoff plan. 

The big question, the one that propels us toward a greater understanding of finances, is, "What got me here?" For some of us, it's putting our heads in the sand, ignoring debt until it's so big we can no longer pretend it doesn't exist. For others, it's never learning to say no to immediate gratification. Or you might be in the category of folks who ended up in debt because of a financial crisis totally out of their control, such as the death of their wage-earning partner.

Whatever the reason for your current situation, now is a good time to identify it. Once you know how the debt occurred, you can begin to make plans for preventing it or handling it in the future. 

When it comes to the big decision of whether you should use a personal loan to pay off credit card (and other) debt, the answer depends on whether doing so could help you save money, get rid of your debt at a faster clip, and get a better night’s sleep. 

While a personal loan for debt consolidation won't immediately get rid of your debt, it could provide you with the breathing room you need to develop positive financial habits that will serve you well throughout the remainder of your life.

When is a personal loan a smart way to consolidate debt? 

A personal loan may be the right choice for you if:

• You're carrying high-interest debt, but you can qualify for a personal loan at a lower interest rate.

• You're juggling several monthly payments and want to simplify your life with a single personal loan payment. 

• You want the predictability of fixed payments that come with a personal loan, so you never have to guess how much your monthly payment will be. 

• You have a clear timeline for paying off your debt, and a personal loan provides the structure you need to stay focused. 

• You want to consolidate existing debt without having to provide collateral. 

Here's a step-by-step guide:

• Add up how much debt you'd like to consolidate.

• Check your credit reports for any errors that could lower your credit scores.

• If you find errors, report them to the credit bureau. 

• Talk to a lender who allows you to prequalify without a hard credit inquiry.

• Once you find a loan offer that meets your needs, you're on your way to becoming free of high-interest debt. 

Using a personal loan to consolidate debt is a smart move if you want to secure a lower interest rate, simplify your monthly payments, and get rid of debt faster. Find out if you qualify.

If you determine that debt consolidation isn't right for you at this time, that's okay. An alternative to debt consolidation may be a better fit.