Credit cards can pose a great threat to users’ financial well-being, as the average U.S. household carries $6,662 of credit card debt. With outrageously high interest rates and low minimum payments, there can be no end in sight for some borrowers. Taking out a loan to pay off debt may seem impractical at first, but there are actually a number of benefits. If done responsibly, borrowing a personal loan to take care of your debt might actually be a plausible solution.
How to Pay Off Debt with a Loan
Using a personal loan to pay off debt, specifically credit card debt, is called a credit card consolidation loan. If you’re someone with multiple credit card bills, you may be able to pay off your higher interest debt faster by consolidating your credit card debt into a single loan payment with a lower interest rate.
If you have a $4,000 balance on your credit card with an 18% ARP, and qualify for a three-year personal loan at 12% ARP, your monthly payment would be $133, paying $783 in total interest over the life of the loan. If you keep the debt on your credit card and paid $133 a month, you’d pay off the debt in a little over three years, with $1359 in interest during that time. So, using a credit card consolidation loan could save you $576.
- Lower Rates
There’s no guarantee of lower interest rates, as all lenders have different criteria. Credit score, debt-to-income ratio, employment, and credit history generally determine interest rates. A high credit score and low debt-to-income ratio will usually get you the best possible rates. If you can’t get the most ideal rates, even just a little change in interest can make a big difference, especially if you have a large amount of debt.
- Single Payments
Managing multiple credit card accounts can be strenuous. It can be difficult keeping track of different payment deadlines, payment amounts, or missing them altogether. Paying off multiple credit cards with a personal loan consolidates that debt into one monthly payment, meaning fewer bills to worry about.
- Quicker Payoff
Making minimum payments on a substantial, or multiple, balances could leave you in debt for years, as credit cards have no set repayment periods. If the balance is high enough, you could be paying it off for your entire life. With just one monthly payment and a fixed interest rate, you’ll be likely to pay off the loan in a much shorter period of time. Most debt consolidation loans have payment periods of 24 to 60 months.
- Credit Score Boost
If your credit report is highly consumed by revolving accounts, expanding it by taking on a personal loan with likely improve your credit score. It’s important to make the monthly payments in full and on time, showcasing responsible debt management. The increases won’t be instantaneous or monumental, but it’s a step in the right direction.
Personal Loans with TLC
At Total Loan Company, we make our loans as individual as the people that apply for them. When life happens, we listen, we understand, and we help our customers when banks abandoned them. We consider all applicants and our process is quick and easy, so never hesitate to apply!