Personal Loans to Pay off Debt: What To Know
Are you drowning in high-interest credit card debt? Perhaps you’ve got multiple bills, and it’s getting difficult to track all your payments.
If any of these scenarios apply to you, taking out a personal loan to pay off debt may be a strategy to consider.
Whether it’s used to pay off credit cards, medical bills, or even student loans, we’ll explore factors to consider when getting a loan to pay off debt.
Personal Loan vs. Other Loan Types
When deciding whether getting personal loans to pay off debt is a good idea, you must first understand what a personal loan is.
A personal loan is when you borrow a fixed amount of money from a bank, credit union, or lender. You must pay back this amount through regular payments over a set period of time. Payments include interest as well as any applicable fees.
Personal loans can either be secured or unsecured. A secured loan requires collateral, such as your home or car. You’ll typically get better rates with a secured loan.
There are very few limits on what you can use a personal loan for. You can use a personal loan to pay off credit card bills, complete home renovations, or go on vacations.
Other loan types contrast with standard personal installment loans primarily in their intended use. Loan terms and rates will also differ, depending on the type of loan. Here are some other common loan types:
- Student loans: Students can take out loans to help fund higher education. Student loans can be federally or privately funded loans.
- Auto loans: Offered by banks or the dealership to pay for your vehicle. If you miss payments, you may risk losing your car.
- Home equity loans: When the value of your home is greater than your mortgage, you can tap into your equity through a home equity loan.
- Vacation loans: If you’re looking to fund a vacation, you may consider a vacation loan. This type of loan is essentially a personal loan.
Pros and Cons of Personal Loans to Pay Off Debt
Getting a loan to pay off credit cards or other types of debt has its advantages and disadvantages. Here we explore some of these pros and cons:
- Lower interest rates: Personal loans can have lower interest rates compared to high-interest credit card rates.
- Consolidating payments: Instead of tracking multiple payments, you can consolidate your debts into one payment with a personal loan.
- Versatility: Get a loan to pay off debt of any kind. Compared to an auto, student, or mortgage loan, a personal loan is much more versatile.
- Predictable: A personal loan consists of regular payments at a fixed interest rate for a specific period of time. Budgeting and planning is much easier with a personal loan.
- Does not eliminate your debt: Using a personal loan to consolidate your debts does not actually eliminate your debt. It is simply repackaged into one loan. You must still exercise self-discipline to avoid incurring additional debt.
- Early repayment fee: This is also known as a prepayment penalty. If you pay off your loan early, you may be charged with a fee.
- Potentially higher payments: While you may have a lower interest rate with a personal loan, the monthly payments may end up being higher than your minimum credit card payments. These higher payments could cut into your monthly cash flow.
Factors to Consider When Evaluating Personal Loans
Should you get a loan to pay off credit cards? You’ll need to weigh out several factors when deciding if taking out a loan to pay off credit card debt is right for you.
Ideally, you want to secure a personal loan with a lower interest rate than your credit card rates. Ensure to account for any additional fees or terms and conditions that may be associated with the loan.
A personal loan with lower interest rates could save you money long-term. However, sometimes lower interest rates could mean higher monthly payments. You must evaluate your monthly cash flow to ensure you can keep up with your loan payments.
Finally, a personal loan might make sense when you have numerous debts owing. By consolidating all your debts into one loan, you’ll only need to make one monthly payment. Managing your finances is much easier when your debts are consolidated.
Factors Lenders Will Consider
Lenders will look at a variety of factors when approving loans to borrowers. Interest rates will also depend on the borrower’s financial history. In general, a strong financial background means better rates and terms.
Here are a few factors lenders will consider:
- Credit score
- Employment history
- Debt-to-income ratio—a measure of your monthly income vs. monthly debt obligations
- Whether you filed for bankruptcy
- The value of collateral (for secured loans)
There are many reasons why it might be beneficial to take out a personal loan. Credit card bill payments typically have higher interest rates, costing you more over time. Moreover, a consolidated loan can make it easier for debt repayment.
Tower Loan specializes in helping clients obtain various loan types. We work hard to offer you the best solutions for your financial needs. If you’re looking for an online loan, our process is as simple as completing a short application form. Let us help you today!