Personal loans are financial products in which a lender gives you money without you having to put up any collateral. The loan is giving to you on the promise that you will repay it (with interest of course).
Personal loans are typically used for large expenses like weddings, adoption fees, home improvement costs or medical costs. Simply put, the interest rate on a personal loan is typically less than what you may get with a credit card, so it would make more sense to finance these expenses with a personal loan.
Another reason people take out personal loans is to pay off their credit cards. In other words, it's become a viable option for people to consolidate multiple credit cards or refinance high interest debt.
Do You Find Your Multiple Debts Unmanageable?
Consolidating is what you do when you have multiple debts with varying interest rates. When you consolidate the intention is to combine everything into one debt so that it's easier to manage.
If you're having a hard time managing multiple credit cards then you may want to consider paying them with a personal loan and then sticking to one loan payment. Sometimes simplicity and ease are the keys to a better financial life and personal loans may help you make things less complicated.
Additionally, depending on the situation, it may be easier to secure a personal loan than use a debt consolidation service.
A couple things to keep in mind here:
- Don't do this unless you really feel like you can't manage your debt. Interest rates on personal loans can be high depending on the lender.
- Don't do this if the interest rate on the loan is more than the interest rate on your credit cards. Otherwise you are just losing money.
- If this is a viable solution for you make sure to shop around for a reputable lender. Unfortunately there are personal loan scams out there.
- Make sure to have all the documentation necessary so that you are approved for a personal loan. You don't want to go through the process of getting rejected and having a hard inquiry on your credit report.
Is Your Credit Card APR Through the Roof?
Refinancing is when you renegotiate your payment terms for a lower interest rate (or lower monthly payments depending on the situation). In this case someone would pay of the high interest credit card using a personal loan with a lower interest rate.
Credit card interest rates are dependent upon your personal credit history, which means you may not be able to get a good deal. Even if you do have excellent credit, you may still be looking at credit card interest rates in the mid teens.
Personal loans on the other hand, have an average APR of 11 percent. This is far less than what you will find with most credit cards.
Of course, this isn't a rule of thumb. Interest rates on loans can vary according to lender and your credit history. However, if you're staring at a 20 percent APR on your credit card then you would probably want to pay it off with a personal loan with a lesser interest rate.
A couple of things to keep in mind:
- You can try to negotiate the APR on your credit card before applying for a loan. If this doesn't work, or if the APR still isn't feasible, then you may want to consider the loan.
- If you are looking into refinancing to lower your monthly payment, make sure the interest rate too high. Otherwise you're going to end up paying more money out in the long run.
Using personal loans to pay off credit card debt is a viable option for some, but not all. Whether or not you apply for a personal loan is going to depend on how much debt you are carrying, interest rates, personal credit history and how many lines of credit you have open. Make sure you choose the best loan for your needs.
For more on personal loans check out our reviews and guides.