Consolidate Credit Card Debt with a Personal Loan Last updated on December 3, December 3, Debt consolidation is the process of combining your existing debts into one new debt. When the new debt offers a lower interest rate than your existing debts, you can save money by reducing the amount of interest paid to the lender. Because credit card debt usually carries double-digit interest rates, consolidation can provide significant interest savings over time.
The best consolidation options include balance transfers, personal loans, or secured loans. With a personal loan also called a debt consolidation loan , you borrow a fixed amount of money for a specified period of time usually years. The loan can be used to eliminate existing credit card debt, leaving only the personal loan to be repaid. Interest savings When you obtain a personal loan to eliminate credit card debt, you can reduce the interest rate on your debt.
As you reduce the interest rate, you also reduce the required minimum monthly payment. If you need a longer repayment period, a personal loan is worth considering. A prepayment penalty occurs when you pay off your personal loan balance ahead of schedule. For example, if you obtain a 5-year personal loan, some companies demand that you maintain the loan for the entire 5-year payment. If you pay off the balance at an earlier date, the creditor loses expected interest payments, which is why some loan providers try to charge a fee.
Your credit When applying for a personal loan, your interest rate will depend on your creditworthiness. If you have poor credit, the interest rate will be much higher and the loan will be less valuable for debt consolidation. SoFi discussed below claims an average credit score increase of 17 points. Spending discipline If you are approved for a new personal loan, will you use the money as intended? The loan is meant to help you get out of debt, not increase your spending. Each provider will allow you to check your loan interest rate using a soft credit inquiry.
A soft credit inquiry does not affect your credit score whatsoever, so there is no harm in comparison shopping when choosing a loan. After comparing interest rates, you can select a loan provider and complete the full loan application. Only after applying will the loan provider request your complete credit profile which could result in a hard credit inquiry.
Variable interest rates start at 5. There are no origination fees or pre-payment penalties, and existing SoFi borrowers can receive an additional 0. Credible Credible offers a personal loan marketplace that is completely free to use. After filling out one simple form, you receive personalized loan rates from six of the largest personal loan providers, including Avant, Lending Club, Prosper, Pave, FreedomPlus, and Upstart.
These loan providers offer rates as low as 4. The biggest downside to the Credible marketplace is that some of the lenders charge origination fees but no prepayment penalties , whereas SoFi does not. The good news is that any origination fees are disclosed upfront in the application process. Local Banks or Credit Unions SoFi and Credible offer the best personal loans on the internet, but you might also consider shopping around at local financial institutions. The terms and conditions will vary by each local lender, so make sure to request detailed loan information before making a decision.
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