If you have high-interest debt on several credit cards, you may be struggling with mounting interest costs, high monthly payments and keeping track of your due dates. Using a personal loan to pay off debt can help you reduce the number of payments you’re juggling each month. And depending on your loan terms and current debt, you may save a lot by paying less in interest costs.
How a personal loan can help you repay credit card debt for less
A personal loan allows you to borrow a lump sum of money at a fixed interest rate and use it for just about any purpose. Then, you repay the personal loan over a fixed time frame. When you use a personal loan to consolidate or refinance credit card debt, you’ll ideally find a personal loan that offers better terms than on your current debt. For example, a personal loan can offer the following depending on your eligibility:
- Lower APR: The APR is a measure of your cost of borrowing and includes the interest rate plus other fees. APRs may start as low as 4.99% and reach 36% or higher, though you’ll need good or excellent credit to get the most competitive rates.
- Fixed repayment period: Personal loans have fixed terms, usually ranging from 12 to 60 months or longer. A shorter term would minimize your interest charges, but come with higher monthly payments. A longer term would do the opposite.
- Extra cash: You can apply for more money than you need to repay your existing debt. Lenders can offer $1,000 to $50,000 or more, depending on eligibility.
Personal loans are usually unsecured, meaning you don’t have to put down collateral to qualify for the loan. Before using a personal loan to pay off credit cards, check the terms and consider the costs involved. The loan may also come with extra costs such as origination fees, which the lender charges for processing your loan application. These may range generally from 1% to 6% of the total loan amount. Some lenders also charge prepayment penalties, which are additional fees for paying off your loan early.
How to consolidate credit card debt
- Check your credit. Reviewing your credit reports and credit score can help guide your next steps. If your credit score is low, then you can work on improving your credit and apply for a loan later. Or, you may decide to check out loans from lenders who extend offers to borrowers with your kind of credit.
- Assess your financial situation. Figure out how much debt you need to pay off and the interest you’re paying.
- Get prequalified and compare your options. A prequalification usually involves a soft credit pull and provides a peek at potential loan offers. Prequalify with a few lenders so you can compare APRs, fees and other loan information before formally applying.
- Formally apply with a lender. Once you’ve chosen a lender, complete the formal application. Expect to provide documentation, such as pay stubs and tax information. Heads up here: The loan application will trigger a hard inquiry on your credit reports, which can have a temporary negative effect on your credit score.
- Pay off your old debt. You may hear from the lender immediately or within a few business days. In most cases, the lender will direct deposit funds into your account, and you’ll be responsible for paying off your old debt with those funds. However, some lenders, like Discover Bank, will pay off creditors directly.
- Pay down the personal loan. Making your monthly payments on time will help you boost your credit scores and avoid late fees.
Who is a good candidate for a personal loan?
A personal loan could be a great option for those with strong credit and healthy finances. These individuals could see competitively low APR offers, as well as a flexible range of repayment terms and borrowing amounts to choose from. However, you should be in a comfortable position to make payments each month on a fixed term, which can last years.
On the flip side, using a personal loan for credit card debt might not be worthwhile if you only qualify for higher interest rates — that’s because you’ll end up paying more interest over time. If you can’t afford the loan, missing payments will negatively affect your credit scores.
Even if you qualify for a low interest rate and a manageable loan payment, it’s important to consider why you got into debt in the first place. For example, if your credit card debt grew over time due to ongoing financial challenges, debt consolidation may not be that helpful, as you could continue racking up credit card debt.
Balance transfer: Another way to restructure your debt
A balance transfer is another way to consolidate your credit card debt. With this strategy, you move one or more credit card balances onto another credit card with a 0% introductory APR.
This type of offer usually lasts 12 to 21 months. If you can pay off the balance before the promotional period expires, you’ll be paying off your debt without paying interest. Fail to do so, though, and you’ll be charged back interest from the original purchase date.
Make sure you understand the terms, though. For example, the issuer may:
- Limit how much you can transfer.
- Require you to complete the transfer within a certain time frame.
- Revoke the intro APR if you’re late on a payment.
- Not allow balance transfers from another card within its network.
- Charge a balance transfer fee, generally between 3% and 5% of the transfer amount.
Taking out a personal loan to pay off debt is an attractive option that could save you money over time. However, it’s important to understand the loan terms and check whether it makes financial sense for you in the long run.
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