How to Use a Personal Loan to Get out From Under the Monster of Credit Card Debt
March 15, 2019 | By Ana Elliot
Ah, credit cards. They are a fixture of life. A lot of us, when we hit 18, got a credit card to help build up our “credit” in the hopes that when the day came that we needed to impress some lender, car dealer, or an apartment complex that we are responsible spenders and payers. It sounds great on paper.
Credit cards help when you need some cash for a big purchase that you wouldn’t be able to buy otherwise! This is a great system!
Or is it?
Look, no one is out to badmouth credit cards. They are important to building credit and they are super useful in those moments where you need new tires or to buy a new dishwasher but… their usefulness quickly turns into heartache if you can’t pay back the whole balance at the end of the month. Then you start bumping into a nasty little thing called interest and suddenly, its 10 months later and you are up to your eyeballs in credit card debt.
If this sound familiar or you are living through this right now, you might be wondering how you get out from under the tyranny of credit card debt. Well, we have an answer! Why not think about a personal loan!
So, What Is a Personal Loan?
Before we get too excited, you might be wondering what in the world is a personal loan? Well, we can answer this question: NerdWallet defines a personal loan as “ 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.” That is pretty straightforward, 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. Now, you might be thinking, “This all sounds pretty standard for a loan. I borrow money but isn’t that what got me into this mess? Borrowing money.” Well, reader, yeah. It might have been through a line of credit so how is a personal loan different than just… using your credit cards. Either way… you still have debt, right?
How Does a Personal Loan Help my Credit Card Debt?
If my point in the last paragraph is niggling away at your brain, fear not. I’ve got an answer. A personal loan is ideal for people who have a lot of debt out on different credit cards. This means people in this situation are making multiple payments a month and they are probably dealing with different interest rates on each account. Of course, this depends on the card and what the person’s credit score was when they opened the account.
If this sounds like a messy situation, it is because it is. If you wanted, you could consolidate your different credit cards to a new one. If you qualify for a balance transfer card, this is often a great idea because it will come with 0 apr for the first 12 or 15 months which can make a huge difference. But, if you do not qualify for a balance transfer card and all of its perks, trying to consolidate to another card could saddle you with a higher interest rate that you had to begin with.
This is where a personal loan really shines. With a personal loan, you can either pay off all of the separate cards or consolidate to one card then pay it off all at once. Either way, this gets rid of those pesky multiple payments every month and will be a lower fixed interest rate. The other benefit of a personal loan is that they have fixed monthly payments. With credit cards, your minimum monthly payments fluctuate which makes planning your monthly budget harder to do. A personal loan can eliminate that and get your monthly budget more streamlined. Please note, the terms of a personal loan 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?
Applying for a Personal Loan
You can apply for personal loan online directly through the lender or in person. Regardless of which option you chose, you need to do some research before you start committing to anything. There are tons of different loans available.
The internet means you have a wealth of knowledge and options available to you so make sure you use it! Look up different loans out there and do some comparing. 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 ) are great ideas to help you compare and make educated decisions.
What do you need when you apply?
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 is it. Some lenders might ask for information for people close to you in case you don’t make payments but other than that, with that info, you should be good to go. Before you go apply willy-nilly though, let me recommend taking a pause.
You might have picked out some shiny new loans that look great, but just going ahead and applying first thing could be detrimental overall. You need to look into pre-approval first.
Hey, what is this pre-approval thing now and how will it help my credit card debt?
While I’m not about to sit here and say pre-approval for personal loans will directly help credit card debt, it will help your credit score. Once you’ve done the super important research and gotten a few lenders you are interested in, you might be tempted to go out into the world and just… apply to them all and see which option is the most promising.
While this is a great idea on paper, it has some issues in use. Mainly, “hard” credit checks. What is a hard credit check and why does it have the air of something dangerous? Well, Hard credit checks happen when a lender runs a full credit history when you apply. Each hard check gets recorded on your record and will negatively affect your credit score.
To avoid this, a pre-approval application is key. Pre-approval requires less info upfront from you and will only do a partial credit history check or a “soft check.” A soft check does not get recorded on your credit report and will not affect your score. You might be worried that the pre-approval rates and terms might be too different from the actual approval rate but, you’d be surprised.
Most algorithms are fine-tuned enough that you should get a pretty close approximation of what your actual terms should look like. That being it will never be exact. Either way, if you want to keep your credit clean and apply for personal loans, this is the way to go.
What Are the Downsides to Personal Loans?
So, there are always two sides to every story and it would be remiss of me not to present both of them. A personal loan only truly works if your credit score and income are 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 its 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? This is why that pre-approval process we mentioned before is so important. If you don’t get pre-approval, you might not end up getting a mark against your credit only to find out that you can’t use a personal loan for your benefit anyway.
Personal Loans for Credit Card Debt
Ultimately, personal loans are great tools to help deal with credit card debt that has gotten out of hand but the benefits really depend on you and your financial setup. You need to do your research: look at your financial situation including your credit score and income, look at the loans available, and do solid comparisons before making any decisions.
Basically, everything goes back to research. If you do good research, you’ll end up in the best position to make a decision to get your credit card debt in check!