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A personal loan could make a positive impact on your finances if you use the money to reduce your debt payoff cost. Learn more here.
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A personal loan is one option available to you if you need to borrow money. You can get one from online lenders, banks of all sizes, and credit unions. And as with pretty much all kinds of loans, you’ll pay interest on the amount that you borrow.
In many cases, taking on debt is bad news because the interest costs make things more expensive for you and because you’re committing income you haven’t even earned yet to pay back what you’ve borrowed.
But there are certain circumstances when taking out a personal loan could actually help improve your financial situation. Here’s why.
How could a personal loan make your financial life better?
A personal loan could improve your financial situation if you are taking out the loan to make debt payoff cheaper and easier.
Say, for example, you have two credit cards, each of which are charging you interest of 20.68%, which is the current average interest rate for cards as of May 2023.
You have a $5,000 balance on one card, with a monthly payment of $100You have an $8,000 balance on another card, with a monthly payment of $160
If you can qualify for a $13,000 personal loan with a five-year repayment term at 11.48%, which is the current average interest rate for personal loans as of May 2023, you could lower the cost of both of those debts by using your loan proceeds to pay off the balances on the cards.
How would this help you? The table below shows what it would look like if you kept paying on your cards versus if you took out a personal loan to pay those balances off.
In this case, it’s clear that taking out a personal loan would be the right move. Who wouldn’t want to be debt-free four years sooner and save $12,953.96 in interest?
Is a personal loan right for you?
If you have high-interest debt and can qualify for a personal loan at a lower rate to consolidate it, it’s almost always a good idea to do so as long as you are confident you can make your new monthly loan payments.
You can shop around with different lenders to see what personal loan rates and terms you’d be eligible for and to see if paying off your current creditors with a personal loan would save you money by comparing total repayment costs over time. Your personal loan lender should tell you your borrowing costs and timeline up front when you apply, so it’s pretty easy to see if moving forward with the loan makes good financial sense.
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