Are you one of the 191 million Americans with credit card debt? If so, debt consolidation might be the right choice for you. A debt consolidation loan is a personal loan used to pay off high interest debt. This is a simplified way to combine multiple credit card balances into one payment. Here’s what you need to know about credit card debt consolidation and whether it’s the right decision for your financial future.
Advantages and Disadvantages of Personal Loans for Credit Card Debt Consolidation
Personal loans are a common way to help pay off accumulated debt. Whether it’s a bank, credit union, or other lender, the personal loan application process is usually straightforward and often includes flexible terms and hassle-free repayment. However, depending on your situation, there are times when using a personal loan is better than others. Here’s what you need to know.
When it’s a good option and the advantages of using a personal loan to consolidate
- You may qualify for a lower interest rate. Currently, the average credit card interest rate is 16.14%. However, on a more positive note, the average personal loan interest rate is around 9.34%. Interest rates are determined by many factors, including credit rating, employment, and debt-to-income ratio. This means that with a personal loan, it’s possible to get an even lower than average interest rate, virtually cutting your payment in half and paying off your debt faster.
- Easy payment. If you have several credit card, you know it’s hard to keep track of due dates and minimum amounts. If you miss any of them inadvertently, you will incur late fees and a potential drop in your credit score. Using a personal loan to consolidate your debt helps streamline the barrage of monthly bills. Instead of multiple payments at multiple outlets, you’ll make one payment on your personal loan, reducing the risk of error and saving you time.
- Pay off debt sooner with a repayment plan. One of the dangers of credit cards is that you can accumulate large debts without having a repayment plan in place. Continually adding purchases to your card while only paying the minimum keeps you in the vicious circle of debt. However, using a personal loan to pay off that debt comes with set repayment terms, and sticking faithfully to that repayment schedule will allow you to pay it off faster than just meeting the bare minimum.
- There is potential to boost your credit score. Having a strong credit rating is necessary for many of life’s big purchases. Whether it’s a new home or a new car, a high credit score can help you get a loan at a great interest rate. However, having large debts, missing payments or being late can cause your score to drop. Using a personal loan to consolidate debt can help increase it, and here’s why. First, a personal loan adds variety to your credit mix, which affects your score. Having different types of debt shows creditors that you are responsible for the money. The obvious reason your score might go up is because your credit card is being charged off. Maintaining a low credit utilization ratio, that is, the credit you use compared to what is available to you, helps improve credit scores.
Disadvantages and Reasons Why Debt Consolidation Might Not Work for You
As good as it may sound to get a personal loan to pay off credit card debt, it’s not always the best idea. Here are a few reasons why debt consolidation might not suit your lifestyle.
- You could end up racking up more debt. Taking out a personal loan to help pay off existing credit card debt can help many borrowers. However, if you continue to use your credit card and accumulate even more debt while paying off your personal loan, your financial situation will become even worse than when it started. It’s best to sort out potential spending issues before applying for a personal loan. Mastering bad habits will ensure your financial success.
- You might not get a lower interest rate. Although personal loans generally have lower interest rates, this does not mean that you will qualify for them. If your credit is poor, you may not meet the standards for a personal loan, and if you do, the interest rate may not be the lowest you expect. Many lenders allow you to prequalify for a personal loan before submitting an actual application. This is useful if you have a bad credit history and are unsure if a personal loan is in your favor.
- You have minimal debt. If you can pay off your existing credit card debt within the next few months, applying for a personal loan is probably not worth the time and effort. Instead, make an action plan to pay off your credit card as quickly as possible and find a way to control your spending.
Choose a personal loan
Once you’ve decided that a personal loan is your best option, the next step is to figure out how to get one. Many lenders in the market today offer a wide variety of options. Here’s what to consider.
- Interest rate
- Repayment Terms
- Amount of the loan
Websites like LendingTree allow potential customers to search an online marketplace and comparison shop for their loans. Such a market allows businesses to compete for their customers by offering low interest rates and favorable terms. Since there is no set standard for most personal loans, seeing the different options based on your own credit score, loan amount, and loan purpose makes the process less stressful and easier. to manage.
Although the interest rate is based on your credit score, keep in mind that many lenders offer both variable and fixed rates, which you’ll need to consider when comparison shopping.
LendingTree personal loans allow you to find lenders who offer loans from $1,000 to $50,000 with competitive interest rates and other favorable repayment terms. If you’re looking for a personal loan for credit card debt consolidation, having a variety of choices in one place makes it much easier to reach your financial goals.
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