Living with high amounts of credit card debt at high interest is a drain. Every month you struggle to make the minimum payments and can’t see the end of the tunnel. And nearly every day you check the mail you see another offer for a personal loan to pay off your cards. Is the personal loan route the way to go? Like everything, once again, it depends. We’re going to take a look at what taking a personal loan might look like in this context, and weigh the pros and cons.
First off, a personal loan to pay off credit cards is often referred to as a credit card consolidation loan. The main idea is to get a loan with a lower interest rate than what you’re paying on your credit card debt along with a set repayment period. The appeal is getting a defined repayment plan.
For example, let’s say you have a $4,000 balance on your credit card with a 18.00% APR. If you qualified for a three-year personal loan with 12.00% APR, your monthly payment would be $133, and you’d pay $783 in total interest over the life of the loan.
If, however, you kept the debt on the credit card and paid $133 per month, it’d take you close to three and a half years to pay off the debt, and you’d pay $1,359 in interest during that time. You save $576 by opting for a credit card consolidation loan.
Personal Loan Advantages
- Potentially Lower Interest Rates – Even small changes in your interest rate can make a big difference, especially when you’re carrying a large amount of credit card debt. The catch is that getting a low interest rate depends on having good credit, and carrying high amounts of credit card debt can negatively affect that.
- Payment Consolidation – When you move multiple debts into one loan it simplifies the payment process. It’s easier to keep track of and feels less overwhelming.
- Quicker Debt Payoff – With just one monthly payment and one fixed interested rate, you may be able to pay off your loans faster. This is because credit cards don’t’ have a set repayment period.
Personal Loan Disadvantages
- Potentially Higher Interest Rates – Not every personal loan offer will be a lower interest rate than what you’re currently paying. The ranges can be anywhere from 9.95% to 35.99 % APR. You typically need excellent credit to get the best rates. If your current credit card interest rate is 18.00% APR and the loan company offers you a personal loan for 25.00% APR, you’d be better off keeping your current rates.
- It Might Be Unaffordable – If you have a large credit card balance, moving it to a cred card consolidation loan entails having to pay it off in just a few years. This could mean paying even more every month than you currently are.
- Fees – A lot of personal loan companies charge an origination fee. The fee usually ranges from 1 percent to 6 percent of the loan amount. If you borrowed $15,000, for example, you’d pay between $150 and $900 up front.
If you’re thinking about taking a personal loan to pay off credit card debt getting the best deal can be overwhelming and frustrating. Remember, consolidation loans are often secured loans and generally require a good credit score to potentially qualify for and obtain a good interest rate. This is where a credit repair company such as ours can coach you and point you in the right direction. Give us a call today and we’ll be happy to answer any questions you may have about credit repair or anything credit related.