Desperate times may call for desperate measures, but it’s crucial not to rush into financial decisions, especially during challenging times. If your household is struggling with credit card debt, consolidation might be the solution you need. Choosing the right method, however, can be confusing. That’s where this article comes in.
For many, a personal loan can help reduce the overall debt paid over time. However, there are both benefits and costs associated with personal loans. The process can be tricky, so how do you know if a personal loan is right for you? And where do you find credible lenders willing to work with you?
By the end of this article, you’ll understand whether a personal loan is the right solution for your credit card debt. You’ll also learn how to obtain a personal loan and best practices for sticking to a plan and paying off your debt in full. The process requires willpower, but with the right tools, you can manage your credit card debt in relatively simple steps.
What is a Personal Loan?
Personal loans are typically unsecured, meaning you don’t need to provide collateral to obtain one. Instead, lenders evaluate your financial history, including your credit score, debt-to-income ratio, and repayment history. Based on this information, they’ll offer you an interest rate that can be fixed, variable, or a combination of both.
Interest rates on personal loans can range from as low as 4.99% to as high as 35.99% or more. Ideally, you want to secure an interest rate lower than what you’re currently paying on your credit card. By using a personal loan to pay off your credit card balance, you can reduce the total interest owed over the life of the loan.
Pros and Cons of Personal Loans
Financial experts often debate the merits of personal loans. Here are some arguments from both sides:
Pros of Personal Loans
- Versatility: Personal loans can be used for almost anything, without specific restrictions.
- Credit Improvement: Using a personal loan responsibly can improve your credit score.
- Fixed Payments: With fixed payments and interest, you can set a clear financial goal and have a definitive timeline for becoming debt-free.
- Strategic Repayment: Personal loans allow you to move beyond minimum payments and implement a structured repayment plan.
- Flexible Borrowing: You can borrow varying amounts, depending on your qualification.
- Broad Eligibility: Many lenders have diverse eligibility criteria, making it accessible for most people.
Cons of Personal Loans
- Associated Fees: Personal loans often come with fees and penalties. Lenders will charge for processing and paperwork.
- Late Fees and Credit Impact: Late payments can incur fees and negatively affect your credit score. Be aware of these potential pitfalls before accepting a loan.
- Untrustworthy Lenders: Not all lenders have your best interests at heart. Conduct thorough research before choosing a lender.
- No Behavioral Change: While personal loans address debt, they don’t change spending habits. Develop and stick to a spending plan to avoid future debt.
Ultimately, you need to prioritize your financial goals to determine if a personal loan is right for you. Reading this article is one of many steps you can take to make an informed decision.
Best Personal Loan Plans for 2024
Talking about personal loans is one thing, but what are the real-world implications? Here are a few companies you can consider to help you achieve your goal of eliminating that pesky credit card debt:
- Social Finance (SoFi): Frequently rated best overall, SoFi is ideal for those with good to excellent credit and offers benefits like unemployment protection.
- LightStream: If you have good credit and are looking to improve your home, LightStream offers generous repayment terms and low interest rates.
- Upgrade: For those with less-than-stellar credit who need money quickly, Upgrade provides fast funding without pre-payment fees.
- LendingClub: Best for small loans, LendingClub is especially beneficial if you use a cosigner. They also offer peer-to-peer lending options.
- Payoff: Specializing in debt consolidation, particularly from credit card debt, Payoff doesn’t charge late payment fees.
- Upstart: If you have a short credit history, Upstart is a welcoming option with excellent customer service reviews.
- Marcus by Goldman Sachs: Known for no origination fees, Marcus is ideal for bank loans and debt consolidation.
- PNC Bank: Offering both secured and unsecured personal loans, PNC Bank has no origination, pre-payment, or annual fees.
- Citizens Bank: If you have debt exceeding $5,000 and good credit, Citizens Bank is known for a swift application and disbursement process.
Now that you understand how a personal loan can help you consolidate credit card debt and you have a list of potential lenders, what should your next steps be?
Obtaining a Personal Loan: Next Steps
First, it’s important to remember that there are still alternatives available. If personal loans don’t seem right for you, consider other options like balance transfers, home equity loans, or other forms of debt consolidation. Your options are not limited.
If a personal loan feels like the right choice, continue your research. Start by assessing your current financial situation: What is your approximate credit score? How much total debt do you have? What monthly payment can you afford? Then, narrow down your list to a few potential lenders. Speak with their representatives and ask questions to understand their processes better.
Many lenders offer a pre-approval process. While pre-applying or applying might slightly lower your credit score, you shouldn’t have to pay for submitting an application. However, confirm this before you proceed.
Once you’ve applied, compare the offers. Look at the complete picture and read the fine print. What may seem like a good deal could have a hidden interest rate increase after a few months.
Receiving the loan isn’t the final step. Implement your financial strategy and make timely payments each month. When you make the final payment and your debt is paid off, check your credit report to ensure it reflects the updated status: “Creditors should automatically inform the credit bureaus that your account is paid or current. However, mistakes and errors happen frequently.” Ensure your diligent payments are accurately recorded.
Consider (All) Your Options
Personal loans can be an effective solution for managing out-of-control credit card debt, but it’s important to proceed with caution. Use this opportunity not only to improve your financial situation but also to enhance your financial literacy. Broaden your perspective to include investing and saving, setting the stage for a secure financial future. It all begins with you.