Summary: If you have thousands of dollars in credit card debt you may be able to save yourself thousands of dollars in interest payments by consolidating your debt into a personal loan.
It is quite astonishing looking at the statistics for credit card debt in the US alone.
The total owed on revolving credit cards alone is totaling more than $466 billion.
The total debt on credit cards is more than $1.04 trillion.
The average household has around $7000 of revolving credit card debt.
That is the debt they move from one month to the next. If you are feeling overwhelmed by the credit card debt you are facing you are certainly not alone.
One of the options you have to consider is whether to use a personal loan to consolidate your credit card debt.
The idea behind this is avoiding the credit card high-interest rates while having your loans altogether in one place to better manage.
Here is a look at whether that could work, and if so who it would work for.
Gaining a Better Understanding of What a Personal Loan Is
A personal loan tends to be an unsecured loan of a sum of their needs, for any use, from a loan provider.
Often the loan provider is a bank, but there are other lenders now, so there are more options. Unsecured means you do not have to use anything you own to put down against the loan as collateral.
You are not risking your vehicle, home or other belongings as should you not make payments if you have used collateral your lender can repossess them.
It essentially comes down to interest rates.
What is your credit card debt costing you each month?
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Often a personal loan has lower interest rates than credit cards do. For people who have great credit ratings, you can qualify for really great rates, under 10%.
Secured loans tend to have rates that are better, but there is a risk to your collateral. Compare that to the average credit card interest rates of around 16% or more.
If you can get a personal loan at a low rate and have thousands of dollars in debt to pay across several high-interest credit cards then you could save money by getting one.
Is a Personal Loan the Better Choice?
It is worth making the obvious point that taking out a personal loan is a short term solution to your debt problems?
As well as doing what you can to reduce your payments and lifting your debt, you need to look at the cause of the debt in the first place.
Otherwise, it will happen again.
If it is a lack of income is there something you can do to change that?
If it a lack of education, look for free learning that can help you.
If it is a case of keeping up a lifestyle, perhaps it is time to consider what is more important.
A personal loan is a great choice for those with better credit history.
If you have a bad credit history you are not going to get the interest rates on those loans that are lower than what you are paying.
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What is the Problem with Using a Personal Loan Like This?
So what are the things to be aware of using a personal loan in this manner?
- Even though your interest rates are lower on the personal loan than the credit cards, you are locked into set payments over a certain time. This means you could be paying more each month than the minimum payments you were making on the cards.
- Your cash flow could be lower as a result of paying more in monthly loan repayments.
- If you skip loan payments this is going to impact your credit score. This means future loans, mortgages and so on will all be harder to get.
- There can be hidden fees so read what you are signing up for. Loan origination fees, for example, are a charge as a new loan application amounting to 6% or less of the loan. Sometimes rather than paying that fee outright they put it on the loan and then you are paying interest on it each month. Another fee to watch for is the prepayment penalty, where you pay extra if you pay it off early.
You could save money by taking out a personal loan to pay off your credit card debt but it is only a suitable option for certain people.
If you have a bad credit history getting a low-interest personal loan is not going to happen. It is also essential you look at the root cause of the debt so you do not get yourself into more trouble.
If you have a good income, a good credit history and you have dealt with or are dealing with the cause of the debt, then this is an option for you.
Just be sure to ask questions, read the small print and only use a reputable lender.
Mohit Jain is the owner of WhiteLinksSEO, a SEO firm that works with SEO firms in the US helping them manage their backend SEO. He likes writing his mind on credit and money matters. Mohit is sports fanatic religiously following Roger Federer. Mohit has an adorable wife and a 13 year old handsome son. When not working on SEO assignments he loves watching movies and traveling.