If you have high interest debt, you know how suffocating it can be. Worse still, when you have a wallet full of depleted credit cards, a payday loan, or any other type of debt with an exorbitant interest rate, it becomes harder to get out of under it.
Most personal loans can be used for anything you desire, from installing a spa-like bathroom in your home to covering your child’s wedding expenses. One of the best forms of personal loan is the debt consolidation loan. Here’s how it works:
Discover: These personal loans are the best for debt consolidation
More: Prequalify for a personal loan without affecting your credit score
- You add up how much you owe in high-interest loans, credit cards, and other debts.
- You request a personal loan for this amount. If approved, most lenders will deposit the proceeds directly into your checking account. Some lenders will pay off high-interest debt directly on your behalf.
- You make fixed monthly payments until the loan is paid off.
The advantage in real life
Let’s say you have four credit cards, each carrying a balance of $5,000. The average interest rate on each card is 17%. This means you owe a total of $20,000 at 17% interest. Between the four cards, your minimum monthly payment is probably around $600. If you continue to pay the full $600 per month, it will take you 46 months to pay off the entire debt and you will pay $7,259 in interest.
Now let’s say you have a good credit rating and you get a personal loan with an 8% interest rate. If you continue to make a monthly payment of $600, it will take you 38 months to pay off the loan and you will pay a total of $2,694 in interest.
If you are having difficulty making the minimum monthly payment, you may consider a longer loan term. You’ll end up paying more interest over the life of the loan, but your monthly payment will be lower. For example, extending the term of the loan to 60 months will reduce your payment to $406 and you will pay a total of $4,332 in interest.
Compare the prices
It pays to shop around for the best interest rate and term. This means taking the time to contact at least three lenders. Most lenders will do a “soft” credit check before letting you know if you’re approved for a loan and what the rate and terms will be. A soft credit check means there will be no impact on your credit score. It is only when you decide to go with a specific lender that they run a rigorous credit check. Although a thorough check hurts your credit score a bit, it will bounce back after you make a few payments on time.
What to pay attention to
It may seem counter-intuitive, but the lowest interest rate doesn’t always mean the best loan. This is because some lenders charge high fees which only increase the price of the loan. For example, some lenders charge origination fees or administrative fees. If you have a good to excellent credit score, there is absolutely no reason to accept such a loan.
When a lender tells you that your application has been approved, be sure to ask about any fees included in the loan. And don’t just take someone’s word for it. Read the loan document carefully before signing it.
If you have a low credit score, your loan options may be more limited (and you may incur origination fees). However, if you’re trying to get out of high-interest debt, like a payday loan, chances are you’ll get a lower interest rate with a personal loan.
If you find yourself spinning in circles as you try to get out of debt, a personal debt consolidation loan might just be the budget rescue you’ve been looking for.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.
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