Multiple payments, various interest rates, and different balances can make it difficult to pay off credit card debt. Not to mention the nuisance of juggling various due dates and payment amounts. Consolidating credit card balances can make debt repayment easier even if itís just because you have one monthly payment instead of three or a dozen.
How You Could Save With a Personal Loan
Letís say you have five credit cards with a combined balance of $15,000, average interest rate of 18% and a combined minimum payment of $450. If you just make the minimum payment on those credit cards, it would take you 20 years and 6 months to completely pay off the credit cards. In that time, youíll pay a total of $13,743.15 in interest.
A personal loan with a fixed rate and fixed repayment period can shave years and thousands of dollars off your debt repayment. For example, a 60-month loan with a 9% APR could be repaid with just $309.06 each month. In that time, youíll pay just $3,543.43, saving more than $10,000 on interest. If you were struggling to make the minimum payments on your credit cards, consolidating your debt would lighten your load.
You would see even more savings if you consolidated and continued making $450 monthly payments? You could pay off the consolidation loan in 3 years and 3 months and pay just $2,176.55.
Personal Loan Benefits
Personal loans are often better for consolidating your debt because the loan is not secured with any of your property. You donít risk losing your home the way you would if you consolidated with a home equity loan or second mortgage. A personal loan is also a good option if you donít own a home or your home doesnít have enough equity to borrow against. On the downside, personal loan maximums are limited because theyíre not secured with any collateral.
The payment amount is fixed, so thereís never a question of what you have to pay each month. That makes it easier to budget. Credit cards are sometimes more difficult to pay off because youíre tempted to reuse the available credit as you reduce your balance. But, a loan is closed-ended. Once youíve spent the money, itís not available to use anymore.
Qualifying for a Personal Loan
Borrowers typically need a good credit score to qualify for a personal loan large enough to pay off debt. Depending on your credit history and your income, thereís a possibility that you may not qualify for a loan large enough to consolidate all your credit card balances.
Most major financial institutions offer personal loans. The bank where you currently have your checking account is a good place to start, if your account is in good standing of course.
Check your credit report and score before you apply for a loan to gauge your likelihood of being approved. Outstanding delinquent balances, like collections that you havenít paid, are very likely to keep you from getting approved. Clear up these kinds of negative items before making your application. Minimize your loan applications since additional inquiries can affect your credit score and your ability to get approved.
If youíre approved, the loan is deposited directly into your checking account, so itís your responsibility to use the loan toward your credit card debt and not something else.
Furthermore, once youíve consolidated your credit card balances, your credit lines will be open again. If youíre not careful, you could run up your credit card balances and have the personal loan to pay off as well. Thatís why itís important that you refrain from using your credit cards until youíve completely paid off your existing debt.