Loans can be ones saving grace, particularly during times of need. On the other hand, accumulating too much can ruin you, especially if it’s credit card debt. One effective way to repay your debt is by consolidating it with a personal loan. However, is it smart to get a personal loan to repay credit card debt?
A personal loan comes with favorable interest rates and repayment terms as opposed to credit card loans. Thus, using personal loan to pay off a credit card debt is a very smart move.
Credit card boast of one of the highest interest rates, far higher than mortgages or auto loans. Paying such an outrageous interest rates on that credit card debt can make it very difficult to repay what you owe in time. Thanks to a personal credit or loan, you can pay off that credit card advance and take a step further to financial freedom.
Is It Smart to Get a Personal Loan to Pay Off Credit Card Debt?
While some people think of ways to get out of credit card debt without paying, others take responsibility for their debt and search for ways to pay them.
When faced with a high-interest credit card debt, several people choose to pay it off with a personal credit that comes with a lower interest rate.
It is a smart idea to consider this move but ensure that the advance you plan on taking has an interest rate and repayment terms that are much better than that of the former. If you eventually obtain the credit, you must make on-time payments to prevent your credit score from taking a hit.
A personal loan with a favorable repayment term and interest rate can help you eliminate your credit card advance and save money. Because nothing good comes easy, you must be eligible to get a consolidation loan. Your personal loan approval depends on your credit. According to myFICO.com, to qualify for an advance that boasts of the best interest rate and terms, you need to have a FICO score of 670 or higher. This type of credit can be gotten from a bank, credit union, or an online lender.
Reasons People Take Out Personal Loans:
Consolidate Debt | 31.78% |
Fund a Renovation | 21.31% |
Pay for a Vacation | 16.39% |
Cover Medical Expenses | 12.61% |
Fund a Move | 9.58% |
Start a Business | 9.08% |
Pay for Gifts | 8.32% |
Pay for a Wedding | 5.30% |
Pay for a Funeral | 4.29% |
Legal Fees | 4.16% |
Bail Money | 2.77% |
Attend a Wedding | 0.50% |
Should I Get a Personal Loan to Pay Off Debt?
You are overwhelmed with multiple debts, and you have no idea how to repay them before they end up suffocating you. You’ve heard of personal loan, and you’re asking yourself, “Should I get a personal loan to pay off debt?” The answer is yes! But there is an exception. You should only consider the advance if it lowers the annual interest rate you are already paying.
If the interest rates and repayment terms are better than that of the debt you’re already paying, and it helps you to save some cash, you can go ahead. But you should also note that not all lenders will allow you to use this type of advance to consolidate your debt, so ensure you make inquiries before applying.
You shouldn’t consider this option if you feel that you can’t afford your single monthly repayment, because if you fail to make payment at the agreed time, your credit score may be affected. With a bad credit score, you will find it hard to get an advance that comes with favorable interest rates and repayment terms.
Tax debt can also be paid with a personal loan. But if you are in a bad financial condition, the IRS can partially forgive your tax debt after reviewing your situation. This denotes that the IRS can’t obtain more than what you can remit.
Total Personal Loan Balances in the U.S.
2009 | 2015 | 2016 | 2017 | 2018 | 2019 |
$237.5B | $208.5B | $226.0B | $245.3B | $273.3B | $305.3B |
Is a Personal Loan Better Than Credit Card Debt?
It has become very common, people taking personal loans to repay the money they owe on a credit card. So you ask yourself, “Is a personal loan better than credit card debt?” Of course, it is. Credit card debt has a very high-interest rate (around 17%), whereas that of its counterpart has as little as 5%.
A credit card debt can take you years to repay, thanks to its high-interest rate. On the other hand, a personal loan is a short-term advance, one that comes with favorable interest rates and repayment terms (this depends on your credit score). These two loans can affect your credit score either positively or negatively, depending on how fast you make payments.
When you make use of credit cards, you should maintain your total balance below 30% of your total credit limit; and the lower it is, the better for you. Keeping your balance low will lessens your credit utilization ratio, which is known as the second most significant factor in your credit score after payment history.
What Are the Advantages of a Personal Loan?
A consolidation loan doesn’t come with a stringent repayment term or a high-interest rate (this only applies to individuals with good credit score). Below are the advantages of personal loan:
- They Are Versatile
- They Have Reasonable Interest Rates
- Several Lenders Offer Them.
- A Good Credit Is Not Required
- Constant Monthly Payment
- Approval Is Fast
- You Have Adequate Time to Repay It
They Are Versatile:
A mortgage and a car loan are both limited. A mortgage can only be used to finance the purchase of a house, and a car loan is only used to fund the purchase of a car. In comparison, a personal loan can be used for multiple purposes. It can be used to fund a wedding, a repair, medical bills, and that vacation you have always dreamed of; it can also be used to consolidate that credit card debt.
Want to know how to become debt-free? This loan is your answer, but mind you, just because you can use it for anything doesn’t mean you should abuse it. You should be aware of the top reasons to make use of this advance.
They Have Reasonable Interest Rates:
This is one of the reasons why it is fancied and common. When it comes to interest rates, personal loans boast of one of the lowest interest rates while credit cards boast of one of the highest. According to the Federal Reserve figures for Q3 2019, the average interest rate on a 24-month consolidation loan is 10.36%, while the average rate on credit card is 16.97 %.
For individuals who are adjudged to be creditworthy, personal loan rates hang in the range of 6 to 7%. You won’t need to submit a collateral. Unlike secured loan like a mortgage or home equity, which has your home as the collateral, most personal loans are unsecured. This is appealing to individuals who have no collateral to tender.
Several Lenders Offer Them:
Personal loans can be obtained from traditional sources such as banks and credit unions or online lenders, like Sofi and Lendingclub.
A Good Credit Is Not Required:
You can obtain this advance regardless of your credit score. Some lenders consider individuals with an unattractive credit score. Just be rest assured that you will be slapped with higher rates, which can surpass 35%.
Constant Monthly Payment:
Interest rates on this type of advance are constant, so your payment is also constant each month.
Approval Is Fast:
While it can take several days to process mortgages and home equity loans, you can apply for a personal advance online and get feedback as quickly as the next day. If you meet the lender requirements and your request is approved, you will get the money within a few days.
You Have Adequate Time to Repay It:
Most debtors need adequate time to repay the money they owe, and unlike the dicey payday loan, personal loans offer you a reasonable time frame to make payments. The terms depend on your lender and your credit, but they range from a year to seven years.
Average Personal Loan Size by Reason:
Start a Business | 15.820.34$ |
Fund a Renovation | 13.756.05$ |
Consolidate Debt | 9.209.35$ |
Pay for a Wedding | 6.777.13$ |
Legal Fees | 3.625.05$ |
Cover Medical Expenses | 3.596.22$ |
Pay for a Funeral | 3.118.67$ |
Pay for a Vacation | 2.976.05$ |
Fund a Move | 2.884.11$ |
Bail Money | 2.098.27$ |
Attend a Wedding | 724.57$ |
Pay for Gifts | 669.22$ |
What Are the Disadvantages of a Personal Loan?
Based on what you have read so far, a personal loan may seem good to you, but you should know that whatever has an advantage has a disadvantage as well. Having said that, what are the disadvantages of a personal loan?
- You Can Get Trapped in a Cycle of Debt
- They Have Higher Interest Rates Than Some Loans
- They Come With Extra Fees (Origination Fee)
- You May Be Sanctioned for Paying It Off on Time
- Your Monthly Loan and Payment Are Constant
- They Lure Scammers
You Can Get Trapped in a Cycle of Debt:
A personal loan doesn’t eliminate the money you owe; it only reduces your burdens a little. You will still have to repay the advance, but this time, with favorable interest rates and repayment terms.
If you clear your credit card debt with a personal advance and start accumulating more debt on your card, you will return to where you started. And if you are not careful, the cycle will continue in that manner.
They Have Higher Interest Rates Than Some Loans:
Personal loans boast of lower interest rates but only to borrowers who have good credit. If your credit isn’t attractive, you will have to settle for a personal advance with a high-interest rate. So ensure you shop around for the best rate that suits you.
They Come With Extra Fees (Origination Fee):
Several personal loans come with an extra fee, which is known as: “origination fee.” An origination fee is 1% to 6% of the amount you borrowed. This fee takes care of the cost of processing the advance, and it is either included in the advance or taken out of the money that will be given to you. If you borrow $20,000 and your origination fee is 4 percent, you’ll pay $800.
You May Be Sanctioned for Paying It Off on Time:
Regarded as a prepayment penalty, this fee is charged if you retire what you owe before the advance term elapses. This is something you should keep an eye out for when you shop around.
If the advance is large, the extra fees will also be large.
Your Monthly Loan and Payment Are Constant:
While many borrowers fancy fixed monthly payments, there can be a problem if you are already accustomed to little monthly payments. If your personal advance payment is $500 per month for four years and you miss a payment or make a late payment, the lender of an unsecured advance can take you to court.
They Lure Scammers:
Scammers are everywhere, even in the personal loan realm. A corrupt lender may request that you provide a prepaid debit card, for instance, with the claim that it will be utilized as collateral or for loan fees.
Take the necessary precaution to ensure that you are dealing with a legitimate lender. To see if a lender is accredited, check the Better Business Bureau.
What Is the Best Personal Loan for Credit Card Debt?
So you have finally decided that taking a personal advance to repay your credit card debt is a smart choice, but you want to know the best personal advance for credit card debt. The best personal loan for credit card debt is the Marcus by Goldman Sachs. It was chosen because it boasts of the best overall and low fees.
Not all personal loans can help you get out of debt fast, so you need to shop around or the best. Ensure you also search for the one that suits you and your financial situation. Though Marcus by Goldman Sachs remains the best, it has other close competitors, namely:
These loans are amongst the best thanks to their flexible repayment options, low rates, including other factors that borrowers find appealing.
Which Bank Has the Easiest Personal Loan Approval?
Getting a personal loan may not be as difficult as obtaining a mortgage, but some banks and online lenders always like to elongate the process while others make it as quick as possible. Having said that, which bank has the easiest personal loan approval? The USAA Bank is the bank that boasts of the easiest personal loan approval.
USSA doesn’t divulge a minimum credit rate requirement, but according to their site, they are willing to consider individuals with scores below the fair credit range (that is below 640). So individuals with unattractive credit can also apply. Unlike other banks that offer this type of advance, the USAA isn’t only known as a bank with the easiest loan approval; it also boasts of low starting rates, fast funding, and zero origination fees.
The advance provided by USAA has zero application fees. Its duration ranges from 12 to 84 months. It also comes with a yearly percentage rate from 6.99% to 17.65% (which includes a 0.25% discount for automatic payments).
Should I Pay Off All My Credit Cards?
Do you have multiple cards with balances, and ask yourself, “Should I pay off all my cards.” The answer is simple. For the sake of your financial freedom, you should consider paying off all your credit cards.
Having a balance on your card may look like the best way to handle purchases you make. But, carrying a balance will affect you in the long term.
Keeping various due balances on those cards will affect your credit score and eventually, your financial health. Also, paying your credit cards in full can help save some cash in interest and shouldn’t affect your credit score.
One significant benefit that comes with paying off your credit cards is the access you’ll have to available credit should any emergency arise. Life is unpredictable; thus, having available credit to handle emergency expenses can be refreshing. Having zero balance or little balance on your accounts can provide you with credit when you are in dire need of it.
Will Paying Off Credit Card With Personal Loan Help My Credit Score?
You have finally decided to get a personal loan, but you are mindful of its effect on your credit score, so you keep asking yourself, “Will paying off credit card with personal loan help my credit score?” The answer is a big YES! Such advance has a huge effect on that significant factors that constitute your credit score.
Using a personal loan to pay off your credit card can positively or negatively affect your credit rate. It’ll affect it positively if you make on-time payments and negatively if you miss one single payment.
To safeguard your credit score, you will have to ensure that you make the necessary monthly payment to the bank, credit union, or online lender who gave you the loan.
Conclusion:
Sometimes, you need to take an advance to pay off another advance. When it comes to debts with outrageous interest rates, it is advisable that you consider debt consolidation. A good debt consolidation loan (that is one that comes with lower interest rate and payment terms) won’t only help you repay the money you owe fast, it will also help you save cash that you would have spent on an extravagant interest rate.