Three women use a personal loan to manage debt

An emergency fund can help you avoid financial anxiety — a prolonged, constant worry about unforeseen events. More severe than financial stress, financial anxiety can cause harm to one’s physical and mental health if it lasts long enough.

“There’s a difference between financial stress and financial anxiety,” says Dr. Megan McCoy, a certified financial therapist and assistant professor of personal financial planning at Kansas State University. “Financial stress is when something overt happens to us, such as job loss, that [takes away] our means to pay for what we need. Financial anxiety is a fear that something bad will happen, but we can’t quite put our finger on what it is.”

Unfortunately, many Americans face obstacles to building their emergency funds. Bankrate’s Emergency Savings Survey reveals that 62 percent of people feel behind on emergency savings this year. Some have even seen a decrease in their balance.

Of those, 24 percent cited having too much debt. Inflation (53 percent) and having too many expenses (43 percent) were also driving factors. If debt is limiting or preventing you from adding to your emergency savings, a personal loan for debt consolidation could help.

Using a personal loan for debt consolidation

Using new debt to become debt-free may seem counterintuitive, but a personal loan could streamline your payoff plan. By consolidating your debt, you combine all your bills into a single payment with one — typically lower — interest rate. 

Doing so makes it easier to keep track of bills and save on the total cost of borrowing. You may even shorten your payoff timeline and lower your monthly payment, freeing up money to put into an emergency fund or pay your debt off faster.

Seychelle Thomas used a personal loan to pay down credit card debt  

Seychelle Thomas’ debt stems from a time of financial insecurity when she used credit cards to ensure enough food was on the table. Now that she has a stable job and steady income, she can start chipping away at her debt as part of a multi-phase financial plan. 

The first phase was finding a tool that would help her consolidate her debt and put more money toward her principal balance. That tool was a personal loan.

Thomas shopped around for the lowest personal loan rate and most manageable payment. She applied online for a loan with SoFi to consolidate two credit cards with interest rates of 27 percent and 28 percent. 

Now, she has a single interest rate of 13.69 percent. Her monthly debt payment decreased by about $100, and her final payment will be in about 48 months. Thomas wants to invest in her future once she pays off her credit card debt.

“I want to take the money I was paying toward debt, which is upwards of $500 a month, and put that toward investing in my future, she says. “I want to look at some ways that I can make compound interest work for me instead of against me.”

Thomas also wants to contribute to her savings. Luckily for her, she’ll have a small emergency fund to add to once she pays off debt. Others tackling their debt may not be as fortunate.

Daniella Ramirez combined strategies to get debt under control   

Newlyweds Daniella Ramirez and her husband Andres have about $100 in savings. Both in their 20s and early in their careers, the couple is finding it hard to tackle the debt they started accumulating shortly after their wedding — especially with a new mortgage payment.

“Young people struggle with this picture-perfect image of what life should be,” says Ramirez, “You have this beautiful wedding. You have this beautiful house. It’s like step one, step two, step three.”

All those steps to the “perfect life” caused their debt to pile up slowly until, one day, it almost seemingly appeared out of nowhere.

“As soon as we got married, we were like, “Where did all this debt come from?” says Ramirez, who admits they weren’t good at keeping track of their spending or payments.  

The couple wanted to get past this part of their lives, so they researched ways to do just that, stumbling upon personal loans through Google.

“My husband was the one who found out about it,” she says. “I had no idea what a personal loan was. He just googled it really quickly and was like, ‘Hey, this might help us.”

The couple qualified for a $10,000 five-year personal loan through SoFi, consolidating about half of their debt. For the remaining debt, they’re using the snowball method. Once they pay off their debt, they hope to travel and save more money.

“To be honest with you, we have not been able to find the perfect moment to start saving because all that money is going to our bills and credit cards,” admits Ramirez. They hope after a few months of personal loan and snowball payments, they’ll be able to figure out how much they can put into savings, even if it’s just $10 to $20.

As they work to pay off their debt and try to save little by little, Ramirez acknowledges it will take time, comparing getting out of debt to a marathon, not a sprint. But the finish line will come eventually. Just ask Benét Wilson, who just made her final debt payment.

Benét Wilson used a debt consolidation loan to become debt-free

This month, Benét Wilson made the final payment on her debt consolidation loan with Achieve. The $25,000 loan consolidated her car loan and four credit card payments into one interest rate and one payment, automatically drawn from her account each month.

“I was tired of paying willy nilly and not doing full payments,” says Wilson. “I was making minimum payments and realized I am never going to get out of this debt.”

So Wilson filled out a personal loan application online. Within two days, her loan was approved, and she was given a target payoff date of five years. She paid it off in two and a half years.

With a goal to be debt-free and dedication to her payoff plan, Wilson worked two jobs, putting all her money from her second job toward paying off the loan. An unexpected windfall also provided a way to pay a chunk of the principal balance. And those credit cards? Wilson put them into the sock drawer to prevent her from accumulating more debt.

Now completely debt-free, Wilson’s new goal is to have a nice, healthy savings account. While she has about five months’ worth of living expenses saved, she’d like to have between $8,000 – $10,000 in her fund. She also plans to invest more and buy a house within the next year or two.

While it’s encouraging to see her success, Wilson hopes you recognize the irresponsible spending that came before to avoid making the same mistake. “I can be an inspiration,” she says, “but I can also be a cautionary tale.”

A personal loan may have worked for these three women, but it may not be the best option for everyone. In some cases, other financial tools are a better fit.

Alternative ways to pay off debt

Personal loans won’t always be the best debt solution as there are financial requirements, loan minimum and maximum amounts and limited repayment timelines. In those instances, other options may be more effective.

Nonprofit debt consolidation

McCoy and Wilson both recommend first looking into nonprofit debt consolidation. This service pairs you with a credit counselor who will work with your creditors to create a debt management plan that pays off your debt without using a new loan. 

While there is a small fee, it is often much lower than for-profit debt consolidation companies. If you consider this route, McCoy warns to watch for debt relief scams and ensure you’re working with an accredited company.

Balance transfers

A 0 percent balance transfer card can save hundreds of dollars in interest for those with lower amounts of high-interest debt. True to its name, this is a credit card with a 0 percent introductory APR for a limited time. 

With a balance transfer card, you would consolidate your debt into that account and pay it off — interest-free — during the introductory period. You must pay the debt off before the 0 percent period ends. Otherwise, the interest rate could skyrocket, and you’ll have to pay the remaining balance at the new rate. 

Before using this method, ensure you can pay the debt within the timeline, have a repayment plan and meet the credit score requirements.

Home equity

If you have substantial debt and enough equity in your home, you could consolidate your debt into a home equity loan or line of credit (HELOC). These products allow you to borrow against the equity you’ve built in your home and receive a lump sum of money or line of credit that you can put toward paying your debts. 

As with a personal loan, you would then make one payment with one interest rate to the new loan. Another benefit is that you’ll have longer to pay off the loan, which typically comes with a repayment term of up to 30 years.

DIY debt payoff methods 

There are several DIY strategies if you simply want to pay off manageable debt more quickly. Two popular approaches are the avalanche and debt snowball methods. Many employers also offer employee assistance programs to help workers with money management, such as financial counseling and financial aid services. 

Bottom line

Debt is a very well-known presence that can add financial anxiety to your life. It can prevent you from building your emergency fund and saving for the future. 

Using a personal loan for debt consolidation can streamline your payments, lower your interest rate and help you pay off loans faster. But it’s not one-size-fits-all. Know what debt management and consolidation tools are available to you and make a plan that fits your lifestyle and goals.