According to recent studies, close to half of all households in America have credit card debt with the national average above $15,000.
With credit cards typically carrying very high-interest rates, it is for certain that these people are shelling out far too much in interest than they really should be. Personal loans are a very useful method of saving on interest expense as the applicable rate of interest on them is far lower compared to credit cards.
Table of Contents
Personal Loan Explained
As the name suggests, you can take on a personal loan to meet any sort of personal expenses such as a vacation, a computer, and medical expenses or even for debt consolidation. Personal loans may be secured or unsecured. Secured loans need to have collateral pledged to the lender in the form of physical or financial assets that can be liquidated by the lender in case of repayment default. There is no need for any collateral to back up unsecured loans, which is why they are usually costlier than secured loans.
Getting a Personal Loan
You can apply for a personal loan at a bank, credit union, and also to an assortment of private lenders. While you can approach the lenders physically, the availability of online personal unsecured loans has made life really easy for borrowers. The amount you are eligible for depends on factors like your income, credit score, and the policies of the lender. Typical amounts are in the range of $2,000-$35,000 and come with repayment tenors of as long as 10 years. Though there is usually no penalty for repaying, processing fees are almost always applicable and could be as much as 10% of the loan amount. The fee is deducted from the loan amount at the time of disbursement. It is important to factor in the processing or origination fee to arrive at the cost of the loan when comparing lenders, as often the quoted APR may not include this fee.
After Approval of the Personal Loan
Depending on the instructions given by the borrower, the lender will either issue a check or transfer the loan proceeds directly into the borrower’s bank account. From the next month, the borrower is expected to pay the monthly amount as specified in the contract for the tenor of the loan. Each monthly payment comprises the principal and the interest component. If you pay more than the monthly amount you should ensure that the excess amount is set off against the principal and not held in an escrow amount or applied towards future interest accruals. If you pay off the principal amount earlier it means that you pay less interest over the tenor of the loan.
Why Use Personal Loans To Pay off Credit Card Debt?
Lower interest expense: Credit cards are infamous for charging a very high rate of interest on outstanding balances and this is one of the main reasons why people find it so difficult to get out of credit card debt. Personal loans typically are available at lower interest rates so it makes eminent sense to substitute credit card debt with a personal loan.
Fixed terms: All personal loans are bound by a contract that includes a repayment schedule specifying the rate of interest applicable, the tenor of the loan, and the monthly payment payable. The repayment requires financial discipline that can be a welcome change after reckless credit card usage and multiple payments to be executed every month for different cards.
Convenience: When you take on a personal loan to settle multiple credit card balances, you need to make only one payment every month and can avoid the necessity of tracking multiple statements and making the payments on time.
Make the monthly payment affordable: By adjusting the loan tenor you can reduce the amount of the monthly payment to a level that is affordable by you. However, it is wise not to stretch out the tenor too much to lower the monthly payment as you will end up paying a lot more as interest.
Build credit: If you are able to stick to the repayment schedule, the personal loan will act to help build credit that may have been negatively impacted with credit card debt that you had failed to handle properly. Also, eliminating your credit card balances will lower the credit utilization ratio and boost your credit score.
Taking on a personal loan with the express purpose of consolidating credit card debt and settling it can be extremely advantageous provided you focus on getting the best deal possible and then concentrate on repaying the loan in the shortest possible period. With a personal loan to bail you out, it is a perfect opportunity for restricting your debt to make the monthly payment affordable and boost your credit score.
Shared By: Tom Lieber is a personal finance consultant who has a lot of experience in counseling customers with credit card debt concerns. Tom invariably advises his clients to search for online personal unsecured loans to get the most favorable terms.