Using a Personal Loan to Consolidate Credit Card Debt

Debt FreeAre you getting problematic with your multiple credit card debts? It can be worrisome, but there are possible ways to solve it. One of which is by taking out a personal loan to repay your credit card debts. According to financial experts, this option will help to pay your debt faster and not to mention the lower interest rate. But make sure to your credit record is good to qualify for such a loan.

Understanding about a personal loan

Personal loans are a type of loans that allow borrowers to access funds and use it at their own discretion. It is not a secured loan which is why there’s no need to provide collateral for the approval of the loan. This is the reason why it is recommended for those who want to consolidate their credit card debts. You can use a single loan to pay for the incurred high-interest of the credit card debts while paying for the personal loan at a much lower rate. This will not only save you money on the interest rate but also help you  get out of the debt faster.

Is it the right option?

Using a personal loan to solve your credit card debt can be an extremely helpful short term solution. But if you are deeply in debt, for long term relief you need to resolve the root cause of the multiple debts. You can do this by identifying the cause of why you have accumulated debt in the first place. Is it due to lack of income or overspending? Regardless of the reason, you will want to modify how you handle your finances and make a lifestyle change to prevent future debts.

A personal loan can be the best option if your credit rating is not that good to qualify for a 0% introductory APR credit card. Although the interest rate for a personal loan is normally lower than the credit card rates, you should expect that the monthly payment for the loan will be higher than the credit cards minimum payments.

With a personal loan you can save money by lowering your interest rates and also lower your number of payments by consolidating to one loan.  Be sure that when you apply for this type of loan that you read the terms and conditions especially in terms of fees and penalties.  This way you know that you are getting into a better payment plan for your needs with a personal loan vs your current credit card payments.

When is the right time to use a personal loan for debt consolidation?

If you are trying to decide if it is a good time to use a personal loan to consolidate your debts there are two things to consider. First, how many credit card and other debts are you paying off monthly?  If the number is 4 or more you will most likely benefit by consolidating your debts.  Secondly, what are the current rates?  What are the current personal loan APR’s for your

 

current credit score?  If your score is causing your personal loan rates to be higher than average you may want to wait a few months and check rates again.

What to consider before applying for a personal loan

Plan to pay your debt

If you decided to apply for a personal loan to pay off your credit card debts, then it’s a good idea to actually use the loan to PAY OFF YOUR DEBTS. It can be very tempting to use your shiny new personal loan money for other reasons (Like that new couch or dress you have been wanting) but this will only end up putting you further into debt and adding a new payment to the list.

Another thing you should think of is if you can afford to repay the monthly payment for the personal loan.  You do not want to get into a monthly payment that you cannot handle.

Why are you in debt?

As you have read before, using a personal loan to consolidate the credit card debt is helpful for lowering interest rates and number of monthly payments.  However, for the long term it is a good idea to determine reason why you had accumulated such debt.  Once you have identified why debt is accumulating, CHANGE THAT.  Only then a personal loan can be a viable option to streamline and simplify of repaying your debt.  Without lifestyle changes the debt will come right back before you know it.

If you have a high credit score

Before applying for a personal loan to pay your credit card debt, you must ensure to have a high credit score (at least 650). With a credit score of 650+ you should be able to receive approval for a personal loan at a better rate than your current payments.

However, if you have missed payments on your other debts, it will affect your credit score, making it impossible to get a personal loan at a lower rate.

 

Pros and Cons of debt consolidation through a personal loan

Pros

  • Low rate

A personal loan carries a low-interest rate making it ideal for debt consolidation. To avoid hidden fees be sure to check the maximum rate before applying or reviewing your loan documents before signing. Due to low-interest rate borrowers can save money for the loan repayment.

  • Scheduled repayment timeline

When you are approved for a personal loan your payments will usually be on a set monthly schedule.  Make sure to pay on time to avoid any additional penalties.

  • Improve credit score

Your payment history greatly affects the credit score. So make sure that you pay your monthly payments on time to ensure your credit score stays on the rise!

 

 

Cons

  • Possibility to pay a higher monthly payment

If you have only been paying your minimum payments on credit cards you may notice that your monthly payment will be higher for a personal loan.  This is usually because there is a set payoff time frame opposed to credit cards that will let you pay minimum payments forever, barely lowering your balance at all.

  • Additional fees

Some personal loan companies can add various fees like origination fees, application fees, and prepayment penalties. These additional fees can be more costly while you want to consolidate your debt.  Be sure to read the loan terms before applying to avoid these fees.

  • Put your property at risk

Be careful when applying for a personal loan because some are secured loans. This type of personal loan would require you to provide collateral. This would put your property at risk. It is best to look for unsecured personal loans opposed to ones who require for collateral.

 

Keep in mind that if you are using the money from a personal loan to pay off your credit card debt, make sure not to use your credit card again while in the process of repaying the personal loan.

So now you understand how to use a personal loan do consolidate debt along with the Pros and Cons.  When weighing out the pros and cons, many find that a single personal loan payment is a much better option for them as opposed to multiple credit card payments.  But it is all based on the individual so be sure to do your own research to make sure this is the best option for your needs.

 

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