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.
Cons of Using Personal Loans to Consolidate Credit Card Debt
Here are three main cons about using a personal loan to consolidate your credit card debt:
Con #1: Continuing to Use Credit Cards
Doing a consolidation should be part of a bigger plan to pay off debt. If you use a personal loan to pay off your credit cards, but then rack them back up, you’ve gotten deeper into debt. So, you must be committed to never carrying credit card balances again.
Those clean cards can be awfully tempting! Make sure you get a fresh start by only making charges that you can pay off in full each month.
If you continue to accumulate debt, it doesn’t matter how many times you move it around to lower interest options, it will continue to be a drag on your finances and keep you from building wealth.
So know your own capabilities, financial habits, and be honest with yourself. If you don’t have the discipline to use your credit cards wisely after a consolidation, lock them up and only spend cash.
Con #2: Having Higher Monthly Payments
While monthly payments for a personal loan can be lower than the total of all your minimum credit card payments, they can also be higher. As I previously mentioned, the payment amount depends on how much you borrow, your interest rate, and the loan length.
Unlike a credit card where you can make a minimum payment, with a personal loan you’re required to make the full payment every month. If you pay late, you can destroy your credit.
Con #3: Saving Too Little
If your credit card debt is relatively small or you can pay it off within the next 12 months, using a personal loan to consolidate may not save you enough to be worthwhile.
When you know that you can pay off a credit card in the near future, but still want to cut the interest, consider using a zero interest balance transfer credit card. The promotional period on these cards can range from 6 to 24 months, giving you a nice break from interest charges.
However, if you don’t pay off the entire balance before the promotion expires you can end up paying more interest than if you hadn’t made the transfer.
Where to Get a Personal Loan to Consolidate Credit Card Debt?
To sum up, a personal loan is a smart financial tool to use if it’s the least expensive option for you to consolidate debt.
While it may seem odd to use new debt to get out of old debt, it all comes down to the interest rate. By using a personal loan the right way you can reduce your interest payments and get out of debt the fastest way possible.
Having less debt will free up more of your money so you can achieve positive financial goals like building your emergency fund, investing in real estate, or saving for retirement.
Here are some of the best places to shop for your personal loan online:
To see my review of 10 online lenders, including loan APR, maximum loan amounts, and type of loan offered (such as personal, student, auto, home, or business) download the free Online Loan Comparison Chart (PDF download).
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