How to Use a Personal Loan to Tackle Your Credit Card Debt
February 7, 2018 | By Ana Elliot
Credit cards are often there for us when we need them. If things are tight at the end of the month and you need a little help paying groceries— credit cards are there. If you need to make a large purchase you can’t pay off right away, credit cards are there. But, who is there when credit cards are the issue?
Credit card debt can weigh heavily on your budget and your mind. If you find yourself struggling against high-interest rates to pay off your credit card debt, don't worry, there is a way out. Well, there are multiple ways out but today, let's just talk about how you can use a personal loan to help you get out of your credit card debt.
What Is a Personal Loan?
First off, let's answer this question for those who might not know: What is a personal loan? Well, NerdWallet defines them like this: "A personal loan is money borrowed from a bank, credit union or online lender that you pay back in fixed monthly payments, typically over two to five years.
Lender rates can range from 7% to 36% APR." Sounds good, right? Personal loans are considered "unsecured" loans meaning, simply, that they are not backed by any collateral on the part of the borrower (that's you). You don't have to put your car or something else up to get a personal loan.
What Does a Personal Loan Do for Credit Card Debt?
Another great question! A personal loan is ideal for people who have quite a bit of debt spread out over a few different credit cards. If this is you, you are making multiple payments a moment and each account is rolling in different interest rates depending on the card and what your credit score was when you opened the account.
If this sounds like a messy situation, it’s because it is. While you could consolidate your different credit cards to a new one, this often has high-interest rates if you don't qualify for a balance transfer card. Instead, you can turn to a personal loan. With a personal loan, you would either pay off all of the cards or consolidate your credit then pay it off all at once.
Either way, this eliminates all the other payments, so you only have one and often offers lower interest rates than credit cards. They also have fixed monthly payments, so you won't have any fluctuating minimum payments to worry about. This alone can help make budgeting for your monthly expenses easier! Please note, the terms and how good they depend on your current credit score and income.
Credit.com does a great job showing you how much you could save in interest by using a personal loan for your credit card debt. They give an example of a credit card debt of $7,599.14 with an APR of 19.99%: “If you pay only the minimum payment of $237, the 19.99% APR eats up a big portion of your payment. It might take two decades to repay the balance.
Even if you boost your monthly payment to pay off your debt in three years, you’ll end up paying $2,619 in interest. But what happens if you can pay off this debt using a three-year personal loan at a 9.00% APR? You can save more than $1,000 in interest over the course of three years — and your monthly payment isn’t much different.”
You can see here and from the above paragraph why a personal loan can be so beneficial to your financial life in the face of credit card debt, so how do we get you one?
Apply for a Personal Loan
You can apply for personal loan online directly through the lender, but your first stop should be to do some research. Look at the different loans out there and do some research. Which loans are the closest to what you are looking for or fit your needs the best?
Using loan comparison tools, like this one from NerdWallet, is a great idea to help you narrow down your searches. Once you’ve decided which loans are the best fit, we highly recommend pre-approval.
What Is Pre-Approval and Why Will It Help My Credit Card Debt?
While I won't sit here and say pre-approval for personal loans will directly help your credit card debt, it will help your credit score. When you've chosen a few lenders that look good, you might be tempted to go out there and just… apply to all of them and see who has the best deal for you.
While this is a great idea, in theory, it has some issues in practice. Mainly, "hard" credit checks. Hard credit checks happen when a lender runs a full credit history when you apply. Each hard check gets recorded and will affect your credit score.
To avoid this, do a pre-approval application. This will require less info upfront from you and will only do a partial credit history check or a "soft check". That means it will not get recorded on your credit report, so it won't affect your score.
Most algorithms are fine-tuned enough that you should get a pretty close approximation of what your actual terms should look like but remember, the pre-approval offer might not be exactly your final one. Either way, if you want to keep your credit clean and apply for personal loans, this is the way to go.
What You’ll Need for a Personal Loan Application
Honestly, you won't need a lot. Just your name, address, phone number, date of birth, social security number, and some employer information. Boom. That’s it. Some lenders might ask for the contact information of people close to you in case you don't make payments but other than that, with that info, you should be good to go.
Are There Down Sides to a Personal Loan for Credit Card Debt?
Yet another brilliant question! There are always two sides to things, and it would be remiss of us not to discuss both of them. A personal loan only truly works if your credit and income is good enough to make the interest and payments low enough to be worth it. If your credit isn’t great or has gotten worse recently, you might get a similar or worse interest rate and that would be no benefit at all.
You need to look at proposed interest rates, loan term lengths, and monthly payments to find out if it is really going to benefit you. If it’s a shorter loan term with a smaller interest rate but higher monthly payments that you can’t afford… Well, that isn’t going to help anyone, is it?
Personal Loans for Credit Card Debt: The Closing
While personal loans are great tools to help deal with credit card debt that has gotten out of hand, it really depends on you and your situation. You need to look at your credit score, the loans available, and do solid comparisons before making any decisions. This all takes us back to that point I mentioned before: research. If you do your research, you’ll end up informed and in the best position to make a decision to get your credit card debt in check!