Money Girl explains the pros and cons of using personal loans to consolidate or pay off credit card debt. You’ll find out the best places to apply for a personal loan and how consolidating affects your credit.
About one half of all American households are carrying credit card debt, with an average balance above $15,000. If you’re one of them, you’re probably paying way too much interest for your debt than you should.
In this episode, I’ll tell you the pros and cons of using personal loans to consolidate or pay off credit card debt. You’ll find out the best places to apply for a personal loan and how consolidating affects your credit score.
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What Is a Personal Loan?
A personal loan is money you borrow to pay for just about anything, such as your wedding, a dream vacation, a new computer, medical bills, or to consolidate other debts.
There are two main types of personal loans: secured and unsecured.
- With a secured personal loan, you’re required to pledge collateral, such as a car or house, to back up the loan in case you don’t make payments.
- With an unsecured personal loan, which is much more common, you don’t need to put up any collateral. Unsecured loans are also known as consumer or signature loans.
See also: 5 Ways to Get a Loan With Bad Credit
How to Get a Personal Loan
Personal unsecured loan amounts usually range from $2,000 to $35,000 and have a fixed interest rate. If you want to borrow more, you typically have to apply for a secured loan.
Personal loans come with a choice of repayment terms that may range from 3 to 10 years. If you want to pay off your personal loan ahead of schedule, most don’t charge you a prepayment penalty.
However, most personal loans come with an origination fee that could range from 1% to 10% of the loan amount. This is a one-time fee deducted from your loan proceeds.
You may see an initial interest rate when you apply, but a higher rate when you’re quoted. This is because the fee must be included in the annual percentage rate (APR) for the loan you choose.
That means one lender that seems to have a lower APR may actually be more expensive if they charge a higher origination fee than another lender. So, do your homework by shopping and comparing interest rates with multiple lenders.
Free Resource: Online Loan Comparison Chart (PDF download)