Credit Loan > Personal Loans > Personal Loans and Cleaning Up Your Credit Score

Personal Loans and Debt Consolidation

If you are thinking about making a major purchase or anticipating a substantial expense in the future -- buying a house, a boat, sending a child or several to college, realizing the kids won’t elope and need you to pay for the wedding -- a small personal loan in the present may help you reach that goal. One of the primary items lenders use in determining how much someone can borrow, for how long and at what interest rate, is their credit score. Credit scores are based on a number of things, including debt-to-income ratio. However, credit rating companies look not only at how much debt one has, but also what kind.

In this sense, debt is somewhat like karma. Some debt, such as investment debt, is seen to bring future benefit, and while it should be paid off, it is considered good debt. Other debt, such as credit card debt, is essentially debt that will only cumulatively create more debt without any real benefit. It is, of course, best if one has as little debt as possible, but some kinds are worse than others. Thus, if you are likely to be looking to borrow a significant amount in the near future, it is to your advantage to try to clean up some of the bad debt. One way to do this is through a personal loan for debt consolidation.

If you can gather several smaller debts -- credit cards, car loan, etc., -- under the rubric of one larger loan, this will significantly change the way your debt looks, even if the larger loan may not be completely paid off by the time you anticipate needing money for that large future expense. This should not be attempted under all circumstances. The overall interest rate of the personal loan should be less than what you are paying on your smaller debt -- part of the point of this loan is to pay off debt sooner. The terms offered on repayment need to be within your means, that is, if you cannot afford the monthly payment, this will cause you to default, making your credit rating worse, not better.

You may want to download a loan calculator off the Web while you are requesting your free annual credit report to see where you stand. Both of these tools will be of assistance in determining your risk/benefit level in taking this step. That is, is your potential benefit from taking out a personal loan for debt consolidation higher than your risk of defaulting?

If you have very poor credit, it may be best to focus on simply paying off as much debt as possible and putting off a major expense for as long as possible. The terms on a debt consolidation personal loan may not be good enough to improve your situation, though it is worth looking into.