Personal loans could be a great way for customers to consolidate their high-interest credit debt and pay it down sooner. The interest rates for private loans are usually a lot lower when compared with credit cards. The approval rate for a personal loan can also be fairly fast and often the same working day, depending on the lender.
Some consumers might find it helpful to move high-interest debt from charge cards to personal loans since the rates in it can be much more attractive than charge card rates, said Daren Blonski, managing principal of Sonoma Wealth Advisors in California.
“Additionally, getting your debt consolidated helps with managing and focusing on repaying it,” he added.
There are in least five reasons an unsecured loan might help pay off credit card debt sooner:
- Lower interest rates
- Consolidated payments
- Defined debt-free date
- Improve credit score
- Pay down other debt
1. Lower interest rates
The average 24-month personal bank loan rate of interest was 9.50% in May, based on the Federal Reserve data, while credit card rates of interest were 14.52%.
Obtaining a personal loan means that someone could repay all their credit card debt and instead have just one bill each month and save thousands of dollars in interest.
If you want to capture benefit of today’s lower rates of interest, take a look at online marketplace PayPasser. You are able to plug your data to their free online tools to locate your rate.
A single personal bank loan can help a consumer pay off several credit cards.
For example: If your consumer has three charge cards totaling $12,000 indebted by having an average rate of interest of 17%, the minimum payment could be around $300 monthly (assuming the cardholder pays 2.5% from the balance each month), said Jim Triggs, CEO of cash Management International, a Sugar Land, Texas-based nonprofit debt counseling organization. If your consumer only made minimum payments, it might take 335 months or nearly 28 years to pay for it off. The customer would pay over $15,000 in interest with that debt.
Instead, if your consumer got a new personal loan to repay the $12,000 of credit card debt in an rate of interest of 9.50% having a 24-month term, they’d pay off the personal loan in 24 months by paying $551 per month contributing to $1,224 in interest.
“You can observe just how much the interest rate and larger payments impact the price of borrowing $12,000,” Triggs said.
See what sort of rates of interest are presently open to you using PayPasser’s free rate table.
Credit cards charge a percentage of the balance, calculated monthly according to that current month•s balance. What this means is the payment fluctuates, but if there are no new charges each month the payment actually falls month over month.
“This is a big a part of why it requires such a long time to get away from debt if someone only helps make the minimum payments on high-interest credit debt,” Triggs said.
A personal bank loan is a great chance to get your credit card balance paid off sooner, said Leslie Tayne, a Melville, N.Y. attorney focusing on debt settlement. Consumers have to stay away from the loan cards to supplement their income and to not use that card after they are approved for the personal loan.
Use PayPasser to compare multiple personal loan lenders in a few minutes to ensure you find the best offers.
PayPasser•s personal loan calculator will also help find the best personal bank loan rates.
2. Consolidated payments
A debt consolidation loan would turn multiple monthly debt payments into one payment per month. This method might help streamline a consumer•s personal finances into one.
“Now is an ideal time for you to search for competitive consolidation loans to reduce interest and make better progress towards paying down debt,” said Bruce McClary, spokesperson for that National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization. “Having fewer accounts to help keep track of makes it easier to manage a budget and control debt,” he said.
PayPasser offers unsecured loans from various lenders. To see current personal bank loan interest rates, check out PayPasser.
3. Defined debt-free date
The repayment relation to an unsecured loan give the consumer a definitive date of when they pays business debt entirely. Reaching that date can be a huge relief and financial freedom achievement for borrowers.
Since credit card companies allow users to increase your debt they’re trying to pay off, it is not easy to project credit card payoff dates with accuracy, McClary said.
“Credit card payoff dates in many cases are a moving target,” he explained. “A closed-end loan only moves one way, which makes it easier and much more motivating to remain focused on the aim of becoming debt-free.”
The rates of interest for credit cards in many cases are variable, so having a fixed interest rate “is often helpful for controlling and projecting payoff timelines,” Blonski said.
Consumers considering consolidating their debt can click on an online marketplace like PayPasser to explore personal loan options.
4. Improve credit score
As consumers pay off their credit debt, their credit score can rise. The amount of debt being used is known as the loan utilization ratio. Consumers who reduce their credit debt and resist adding more purchases to the card will boost their credit scores since it makes up 30% of their FICO score.
One reason to use a personal loan is they aren•t taken into consideration in a consumer•s credit utilization ratio, Tayne said.
“This shows lenders just how much revolving credit is being utilized in relation to their total available credit,” she said. “When consolidating credit card debt into a personal bank loan, the utilization is lowered, which can boost a credit rating.”
Personal loans can improve a credit mix, which is the variety of loans for auction on a credit report.
“Lenders like to see that the individual can handle different forms of debt responsibly, and that’s why a diversified credit mix can increase scores,” she said.
5. Reduce other debt
The money that a consumer is saving from paying a lower rate of interest can be used towards other debt for example student loans or auto loans.
“Personal bank loan money is provided like a lump sum payment to borrowers, so consumers aren•t restricted to consolidating one form of debt, unlike most charge card balance transfers,” Tayne said.
Sticking to the repayment schedule of the personal loan is important because, if not, it could lower the borrower’s credit score. Consumers also need to be disciplined and never make use of the credit cards that were paid off, Triggs said.
“This really is one of the greatest pitfalls to paying off credit debt having a personal loan,” he explained. “If a person obtains new credit card debt while paying off the private loan, it might put them in a much worse position compared to what they were in prior to getting the personal loan.”
