Personal Loan to Pay Off Debt | BankruptcyHQ
In a perfect world, nobody would have to obtain personal loan to consolidate or pay off debt. However, borrowing money can be necessary to get out of debt in the real world.
High-interest rates on credit cards are the main reason. Consumers are paying large amounts of interest due to the average credit-card APR exceeding 17 percent. Many cards charge much more.
These challenges are why many people consolidate credit card debt with personal loans with lower interest rates.
A personal loan is a good option for consolidating debt
Consolidating debt with a personal loan is a trade of one type of debt for another. However, this strategy has significant advantages — at least for those who can get a personal loan that offers fair terms and affordable interest rates.
A personal loan is an excellent option to consolidate debt in these situations:
A lower interest rate is possible
FICO scores of 670 and higher are required to qualify for loans with the best terms and interest rates. This is the minimum score that you need to make your credit average. However, it’s a good idea to have a higher FICO score.
Personal loans can often have an APR of as low as 5.99 percent. This is a significant saving over what you would pay for a credit card.
Consolidating your debts can be done in one payment
It can be hard to arrange a debt repayment plan if you have multiple credit cards with their payments and interest rates. To pay off debt, you can eliminate multiple payments by using a personal loan. This will allow you to make one monthly payment and have a lower interest rate.
A lower monthly payment is possible
If you are struggling to pay your credit card debt and are spending more each month on repayments than you earn, a personal loan with a lower interest rate and a set repayment plan may be what you need. To be certain, you will need to use a debt consolidation tool. However, it is possible to secure a lower monthly payment for your consolidated debt with a shorter repayment time and a lower APR.
It is important to know when your debt will be gone
Credit cards have one major problem: your debt may never be paid off if you continue to use them for purchases. Personal loans have a fixed interest rate and a fixed monthly payment. They also come with a fixed repayment schedule which determines when you will pay it off.
You might consider consolidating your debt with a personal loan to reduce the amount of credit card payments and switching to cash or debit cards for purchases.
A personal loan is not a good idea
Although signing up for a personal loan to pay off credit card debt can save money, it is not always possible. There are several signs that you might want to consider a different method of consolidating debt. They may vary depending on your personal situation, but they could include:
A small amount of debt can be paid off quickly
Balance-transfer credit cards are a good option for those with a manageable amount of debt. You can pay it off in 12 to 21 months. You can often get zero interest on balance transfers up to 21 months with a credit card at 0 percent APR. However, a balance transfer fee may apply.
Balance transfer fees can cost you up to 3 to 5 percent of the transferred balances upfront. However, you can save hundreds of dollars on interest if your debt is paid off during your introductory offer. You can also get rewards and benefits from some balance transfer cards. Make sure you compare offers.
You urgently need to get help with your debt
There are times when you may feel powerless to pay off your debts on your own. It’s possible to work with a non-profit Consumer Credit Counseling Services in these situations. The Federal Trade Commission warns you that not all third-party providers of debt relief assistance are trustworthy.
You might be eligible for bankruptcy if you have too much debt to repay in your lifetime. Before you make a decision, it is a good idea to speak with CCCS counselors. The FTC recommends that you review any agency you consider with your state attorney general or local consumer safety agency to ensure you don’t get a bad player.
The bottom line
Imagine not having to pay another credit card bill or having the money to go on a vacation or for other fun activities. You can save money each month by focusing your efforts on debt repayment.
While a personal loan may make sense to consolidate debt, it is essential to look at all options and tools available. Remember that you must stop accruing more debt than you can pay. Whatever debt reduction option you choose to use, you should stop using credit cards. Instead, switch to cash and your debit card when you are in debt repayment mode.