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Personal loans can be excellent financial tools. Find out if one could help you get out of debt faster.
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There have never been more choices when it comes to finding unsecured personal loans, and these can be an excellent financial tool for consumers, especially when it comes to paying down high-interest debts like credit cards.
Here’s a rundown of what you need to know about the pros and cons of using personal loans to help pay down your debt, and a couple of alternatives you might want to consider instead.
Using a personal loan to consolidate and pay off debt
A personal loan can be a great tool to help you get out of debt. For one thing, you may be able to find a personal loan with an interest rate that is significantly less than what your credit cards are charging, especially if you have a strong FICO® Score.
As of this writing, the average credit card APR is greater than 24%. Meanwhile, some of our favorite personal loan companies offer APRs of as low as 7.99% for well-qualified borrowers. While you might not qualify for the absolute best personal loan interest rate, there’s a solid chance that you’ll get a rate that is much better than what you’re currently paying on your debt. Plus, in most cases you can check your personal loan interest rate offers without affecting your credit score.
Not only could you lower your interest rate, but personal loan interest rates are fixed in almost all cases. This means that unlike your credit cards, if interest rates spike higher, your borrowing cost stays the same. You’ll also have a fixed payment every month and a set timetable until your debt is paid off.
In addition, personal loans are a form of installment loan, as opposed to credit cards, which are revolving accounts. Installment loans are generally considered more favorably in the FICO scoring formula. Plus, by using a personal loan to pay off credit card debt, your utilization percentage on your revolving accounts could drop dramatically. The combination of these things can result in a significant credit score boost in many cases, simply by using a personal loan to consolidate your debts.
Alternatives to personal loans
Like most financial products, personal loans aren’t the best choice for everyone. Here are a couple alternatives you might want to explore before deciding.
Balance transfer credit cards: Credit card interest rates have risen sharply in the past couple of years, but 0% intro APR balance transfer offers are still very easy to find. You may be able to get a 0% intro APR for as long as 21 months. Even with the balance transfer fee (usually 3% to 5%), it could still be a financially beneficial option if you can pay off the debt within the introductory period.
Home equity loan or HELOC: If you own your home, a home equity loan or home equity line of credit (HELOC) could be a more economical way of borrowing. Because these loans are secured by your home, they represent a lower risk to the lender, and therefore often have lower interest rates than you can find with personal loans. On the other hand, the downside is that if you can’t pay the loan back, you could be at risk of losing your home.
Is a personal loan right for you?
The bottom line is that personal loans can be a great way to consolidate and eventually pay off high-interest debts like credit card balances, but they aren’t the only option. Be sure to consider some of the alternatives before deciding to apply for a personal loan, and choose the best debt repayment strategy for your unique situation.
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