Smart Move: Debt Consolidation

8/16/2021

If you have high-interest debt, such as credit cards, the payments and emotional weight can be overwhelming. With minimum payments barely covering the high-interest rates, it may feel hard to get ahead. But it doesn’t have to be. 

Whether you have one bill or several, paying off your high-interest debt with a fixed, low-interest personal loan may reduce the burden and save you money. You may also hear it called a debt consolidation loan, as it involves taking out one new loan to pay off high-interest debts. Typically, the new loan will have a lower interest rate than your original debt, so you save money on interest charges. This strategy can also help you get out of debt faster by providing a specific timeline for paying it off. You’ll have just one simple monthly payment for a set amount of time, usually at a lower rate.

You can use a personal loan for almost anything—from financing a vacation, paying for a wedding, helping with moving costs, or making a major purchase–—but consolidating and/or lowering high-interest debt is one of the most popular uses. Let’s explore why, but first, what is it?

What’s a Personal Loan?

A personal loan allows you to get a specific amount of money in one lump sum that can be used for almost anything. You then repay the personal loan monthly installments. The monthly payments include equal portions of the original loan amount, plus interest. 

Benefits

  • Lower Interest Rates. Personal Loans usually have lower interest rates than credit cards, so you’ll pay less interest and save money.
  • Fixed Rate. There are no teaser rates—your monthly payment is always the same. 
  • Clear Pay-off Date. Specific terms—usually from 1 to 5 years—give you a clear line of sight to paying off your debt. 
  • One Easy Payment. If you have several debts, you can use the lump sum amount to pay them all off and easily manage your budget by making one payment instead of several to different lenders/creditors.
  • Improved Credit Score. Paying off high-interest debt with a personal loan may improve your overall credit score by reducing your debt-to-income ratio.

How Does it Work?

  • Application. You first fill out an application for the lender to review.
  • Get Your Funds. If approved, the money will be deposited into your bank account as a lump sum. You can then use the funds for whatever, unless the terms of the loan state otherwise. 
  • Interest. You will pay interest, but again, it’s usually much lower than credit cards and payday loans. 
  • Monthly Payments: You will be required to pay a specific amount back each month. You may pay more if you’d like, but make sure there’s no penalty fee for paying the loan off sooner than the original terms. Some lenders may charge a fee, but most don’t.
  • Credit Building. Paying on time can help increase your overall credit score, as the lender will report it to the credit bureaus each month.

Is this right for me? 

Using a personal loan to pay off high-interest credit card debt (or other debts) is a way of moving your money around for a more favorable interest rate and/or term. The debt is still there, but you move the money you owe from one pile to another.If your goal is to get out of high-interest debt, a personal loan rom a reputable lender can be a great option, but you must also stay away from those high-interest credit cards in order for this to be a smart move.

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