Show
Struggling with Credit Card Debt? Get your FREE quote today!Home » Ask The Experts » Is Consolidating Debt with a Personal Loan a Good Idea? I’ve been looking at your program, but I am not sure I want to go this route or do it on my own. I’d prefer obtaining a personal loan for $10,000, but I can’t get one for less than 28%, which is a $400 payment that I cannot afford. I’m looking for a
payment of around $300. Featured Video Should I Consolidate Debt with a Personal Loan?If you’re thinking of using a personal loan to consolidate debt, make sure that you’ll be able to afford the payments and see the loan through to the end. If you think you may need another solution because you won’t get out of the loan, some lenders won’t agree to allow you to use other solutions, such as a debt management program. This video explains how to weigh the pros and cons of this debt relief option. There are a few key things to consider when deciding if you want to consolidate debt with a personal loan. #1: Are you getting the benefit of reducing your interest rates?The main goal of debt consolidation is to reduce or eliminate interest charges applied to your debt. This makes it faster and easier to pay off your balances, because you can focus on paying off the principal, rather than throwing money away on accrued monthly interest charges. Most credit cards have APR of 18%, but if your credit is bad, those rates could be much higher. However, if you have bad credit, the rates you get on personal loans will also be high, too. In this case, a 28% APR doesn’t sound like it would provide much of a reduction in the interest rate. Thus, you’re not getting the benefit that you’d usually want to see from consolidating debt with a personal loan. For a debt consolidation loan to be beneficial, it must provide a significant decrease in APR. #2: Can you comfortably afford the payments?If you can’t comfortably afford the monthly payments on a debt consolidation loan, then you run the risk of default. In this case, the loan payments won’t work for Candise’s budget. So, even though they may be lower than the total minimum payments on her individual credit cards, they still aren’t low enough to work. In some cases, you may be able to lower the monthly payment amount on a personal loan by extending the term. Extending the term on a loan means you have more months to repay the loan, which lowers the payments. However, most banks and lenders will only offer terms of 4-5 years (48-60 payments) on a debt consolidation loan. If you can’t extend the term enough to get the payments you need, then a debt consolidation loan is not a wise choice. If you’re considering a debt consolidation loan, always review your budget to make sure you can afford the payment. #3: Do you have a Plan B?Although it’s possible to include unsecured personal loans in a debt management program, the lender must always agree to allow you to include a debt in your program. Even credit card companies must agree to allow your card to be included in the program. However, credit card companies are familiar with DMPs and have standing relationships with credit counseling agencies that run these programs. So, they usually readily agree to allow their cards to be included because these agencies have a proven record of helping their clients rehabilitate their debt. By contrast, banks and lenders may not have standing relationships with credit counseling agencies. So, while the agency can call the bank or lender to ask that the debt be included, the lender must agree. And some lenders that specialize in debt consolidation loans aren’t always willing to negotiate. They expect you to pay the loan back under the terms set in your loan agreement. This means you should consider carefully if you’ll be able to successfully repay the loan to get out of debt. If you think you might not reach that goal for any reason, then you may want to consider another option. Don’t get locked into a debt solution that you aren’t confident will help you become debt-free. Do you have questions about debt management programs or finding the right solution for debt relief? Ask our certified financial coaches now! Post navigationInsider's experts choose the best products and services to help make smart decisions with your money (here’s how). In some cases, we receive a commission from our our partners, however, our opinions are our own. Terms apply to offers listed on this page.
LoadingSomething is loading. Thanks for signing up! Access your favorite topics in a personalized feed while you're on the go. Personal loans are a popular way for people to borrow money for a wide range of reasons. While you shouldn't take on extra debt without a very good reason, in some cases a new personal loan can help you get out of debt. Consolidating credit cards or other high-interest debts with a single, lower-interest personal loan can help you save money in a couple of ways. Between lower interest rates and a faster payback period, you could wind up saving a bundle. Insider's Featured Personal Loan Companies
Chevron iconIt indicates an expandable section or menu, or sometimes previous / next navigation options. Chevron iconIt indicates an expandable section or menu, or sometimes previous / next navigation options. APR 5.99% to 21.49% with AutoPay (Rates as of 10/25/2022. Rates vary by loan purpose.) Fees 4.5/5 A five pointed star A five pointed star A five pointed star A five pointed star A five pointed star Fees 4.25/5 A five pointed star A five pointed star A five pointed star A five pointed star A five pointed star APR 7.99% - 23.43% (with all discounts) Fees 4.25/5 A five pointed star A five pointed star A five pointed star A five pointed star A five pointed star A personal loan could be the right fit for you if one or more of the following situations applies: 1. You can get a lower interest rateThe single biggest rule to follow when consolidating or refinancing any debt, even student loans, is this: only consolidate if you can move your balance to a lower interest rate. Moving to a higher interest rate will cost you more in the long-term. You can think of an interest rate as a cost per dollar borrowed per year. If you have $1 on a credit card at 20% APR, you will pay 20 cents per year for every dollar on that card. Going to a loan above 20% means you'll pay more. Below 20%, you'll pay less. This is the case no matter the balance. Most personal loan interest rates are based on a combination of market interest rates and your personal credit history. If you have great credit, you can leverage it to pay off your debts at the lowest possible cost. 2. You want to make fewer monthly paymentsThe more credit card payments you have to make each month, the more likely you are to forget a payment. A late or missed payment can drag down your credit score for up to seven years, so you should always make every effort to pay at least the minimum payment by the due date each month. When you consolidate your debts, you can condense those multiple payments into one. Depending on the debts you consolidate and your APRs, your new monthly payment will hopefully be lower than all your old monthly payments combined. 3. You want to create a debt freedom deadlineIf you have credit card debt, getting to a zero balance isn't always as clear as it is with other debts. Credit cards, for example, allow you to keep adding to your balance. If you spend more than you can pay off in full each month, you're going to find yourself buried in a deepening pit. On the other hand, installment loans come with a fixed number of payments and lead to a zero balance with the final payment. Popular personal lenders offer fixed and flexible terms. If you can convert credit card debt into an installment loan balance, you'll know exactly when your balance will be paid off. By paying off credit card debt and putting the debts into three- or five-year installment loans, debt freedom could be just over the horizon. Alternatives to personal loan debt consolidationPerhaps you were looking for a credit card when you still had a limited credit history, so you settled for a card with a high APR. A few years later, you've been paying your bills on time and have built a solid credit history. You might be less satisfied with your APR. With the credit you have built, you may be able to secure a personal loan with a lower interest rate than what you're currently paying. However, before you go shopping for that loan, it's worth your time to consider some alternatives. Call your credit card company: One painfully obvious but often underutilized strategy for lowering a credit card's APR is to simply ask for one from your credit card company. Though there's no guarantee that they'll say yes, it doesn't hurt to ask especially if you've been diligent about payments. In the same vein, you can also see if your credit card company will upgrade your credit card, which may come with a lower APR and a handful of other perks. Consider a balance transfer: As mentioned earlier, one strategy for getting a lower APR is to move debt onto a balance transfer credit card. These credit cards usually come with an introductory 0% APR period that can last anywhere from 12-18 months depending on the card. That gives you some time to pay off your debts without worrying about your payments outpacing interest. However, you should be mindful that you'll only be able to transfer debt up to that card's credit limit. Debt repayment strategies: Taking out a loan to consolidate debt can be impractical, but if you decide against it, you're still left with several debts that you're struggling to pay off. This is where debt repayment strategies come in namely the avalanche and snowball methods. In the avalanche method, you make all the necessary minimum payments on your credit card. You then funnel the remaining money you're allotting to debt repayment to the credit card bill with the highest APR. With this strategy, you end up paying the least amount of interest. The snowball method is similar, except you take your remaining money and target the lowest balance first. Every debt that you completely pay off frees the money from the minimum payment you would've had to pay. That money is added to this snowball as you tackle the next lowest debt. Smart credit decisions eliminate your debtWhen you pay interest on a credit card, you don't get anything in return. Unlike mortgage debt, which gives you a home, credit card debt is likely due to a smorgasbord of past purchases. When that debt accumulates interest, you end up paying more for whatever you bought using your credit card. Getting into good spending and budgeting habits can help you avoid debt in the future while paying off any debt you have today. Between credit cards, student loans, auto loans, mortgage or rent, and other monthly bills, managing your money may feel like more of a juggling act than anything else. Making smart money decisions with a long-term focus is the best path to financial success. If consolidating can save you money while helping you achieve your long-term goals, don't hesitate to turn in that application today.
Paul Kim is a former Personal Finance fellow at Insider. He wrote explainers and how-tos that helped readers understand how to better manage their money. An NYU graduate, he spent the majority of his journalism career at his student-run newspaper Washington Square News, where he wore numerous hats. Most recently, he helped rebuild the newspaper in the spring of 2021 as its managing editor after nearly all the staff resigned the previous semester over issues of editorial independence.When he's not writing, Paul loves cooking and eating. He hates cilantro. Direct tips on family recipes to @PaulKimWrites on Twitter. Read more Read less
Eric Rosenberg Freelance Writer Eric Rosenberg is a finance, travel, and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full-time. He has in-depth experience writing about banking, credit cards, investing, and other financial topics, and is an avid travel hacker. When away from the keyboard, Eric enjoys exploring the world, flying small airplanes, discovering new craft beers, and spending time with his wife and little girls. You can connect with him at Personal Profitability or EricRosenberg.com. Read more Read less Is debt consolidation a good reason to get a loan?Is Debt Consolidation a Good Idea? Debt consolidation is usually a good idea for borrowers who have several high-interest loans. However, it may only be feasible if your credit score has improved since applying for the original loans.
Can a personal loan be used to consolidate debt?You can use an unsecured personal loan from a credit union, bank or online lender to consolidate credit card or other types of debt. Ideally, the loan will give you a lower APR on your debt.
What is a disadvantage of debt consolidation?You may pay a higher rate
Your debt consolidation loan could come at a higher rate than what you currently pay on your debts. This could happen for a variety of reasons, including your current credit score. “Consumers consolidating debt get an interest rate based on their credit rating.
Does it hurt your credit score if you consolidate debt?Debt consolidation — combining multiple debt balances into one new loan — is likely to raise your credit scores over the long term if you use it to pay off debt. But it's possible you'll see a decline in your credit scores at first. That can be OK, as long as you make payments on time and don't rack up more debt.
|
Is it worth getting a personal loan to consolidate debt
Related Posts
Copyright © 2024 muatrau Inc.
