1 Powerful Way a Personal Loan Can Turn Your Financial Life Around

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High-interest debt can stick around for years, dragging your budget down. Here’s how a personal loan can make all the difference. 

Americans carry a staggering amount of credit card debt. Owing a combined $986 billion to credit card companies, many of us feel the weight of previous purchases each month when it’s time to pay bills. If high-interest loans or credit card debt has you feeling discouraged, here’s how a personal loan can help.

Scenario No. 1

Louis owns a car, rents a nice condo, and generally appears to have it made. However, Louis was out of work for six months and racked up debt. Between the credit card debt and a loan Louis took out to buy furniture before losing his job, he now owes $30,000. The minimum payments on his total debt add up to $900 and this is draining his checking account.

And with an interest rate averaging 17% on the outstanding debt, Louis cannot see a way out. While he’s managed to make the minimum payments each month, he doesn’t feel as though he’s getting ahead. Louis knows that if he continues to make the minimum $900 payment each month, it will take him 46 months to get rid of the debt completely. It’s hard to imagine spending another 46 months coughing up $900 that he’d rather be using to build an emergency savings account.

What’s worse is that Louis has run the numbers and realizes that he’s going to pay just shy of $10,900 in interest on that combined debt. It’s money he could have used to save for a down payment on a house or to invest for retirement.

Scenario No. 2

Louis finally gets fed up with throwing $900 into what feels like a black hole each month. Instead, he visits his local credit union to apply for a personal loan.

At first, Louis is not thrilled with the 9% APR personal loan he’s offered, but once he runs the numbers he realizes how much money he will save. At 9%, Louis’s monthly payment will be $954, $54 more than his current monthly payment. However, his debt will be paid off in just 36 months instead of 46 months, and Louis will pay a total of $4,344 in interest rather than the $10,900 the high-interest debt would cost him. That’s $6,556 extra he can put toward starting a small online business he’s been looking into.

Americans seem to have a love-hate relationship with debt. Many of us buy what we want, when we want, but then regret the choices we’ve made. Properly utilized, debt can be a good thing. For example, taking out a personal loan to pay off higher-interest debt can save time and money. The trick is to refrain from taking on more debt or pulling the credit card out for non-necessary purchases.

Before applying for a personal loan, do this

Lenders save the best interest rates for borrowers with the highest credit scores. Before shopping around for personal loans, make sure your credit score is where it should be. Here’s how:

Order a free copy of your credit report from each of the three major credit bureaus. Legally, you’re eligible for free reports once a year. However, due to the current economic uncertainty, Equifax, TransUnion, and Experian are offering free online credit reports weekly. Look your credit reports over carefully, checking for mistakes. No matter how small the error, circle it. For example, if a report shows you living at an address you don’t recognize or owing money that you have already paid off, make a note of it. Dispute any mistakes with the credit bureau in question through that agency’s online portal. Wait 45 days. That’s how long a credit bureau has to get back with you concerning its findings regarding your dispute. If the bureau cannot prove their information is correct, the faulty information must be removed from your report. Sometimes, removing only a mistake or two is enough to increase your score. Check your credit score. The tricky bit is that Equifax, TransUnion, and Experian will supply you with your credit report, but not your credit score. Many credit card companies now provide their customers with a free monthly credit score. Check the websites associated with your credit cards to learn if one of your creditors offers this free service. Otherwise, it costs nothing to sign up for Credit Karma, where you can see your credit score for free. Credit Karma uses credit scores and reports from TransUnion and Equifax. If your credit score is lower than you would like, take steps to give it a boost before applying for a personal loan. Consider paying down debt and vowing to make all payments on time going forward.

Owing money is no fun, but remember this: You’re smarter than debt. No matter how the debt accrued, you’re able to develop and implement a plan to wipe the slate clean.

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