Dear Student Loan Hero: Why Take On More Debt If I’m Already Drowning in It?

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

dear student loan hero: why take on more debt if i'm already drowning in it
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Taking on more debt when you’re already drowning in it probably feels wrong. In fact, you’d be excused for slamming the door on that idea.

But if you open that door just a bit, you might find that a possible solution is a debt consolidation loan, which is a specific kind of personal loan offered by lenders.

To determine whether borrowing again despite having debt makes sense, answer these two questions posed by certified financial planner (CFP) Brad Ruttenberg.

1. Will your new interest rate be lower?

Right now, you could be struggling to make payments to creditors that are charging high interest rates. Credit card companies, for example, charge variable rates that could rise well above 20.00%.

However, many top personal loan companies, such as Earnest and SoFi, start their rates under 10.00%.

Overall, having a lower, fixed rate on your debt could help you save significantly. As Ruttenberg said, “It’s a simple question of math.”

Say you have $30,000 in credit card debt with a 20.00% rate that you’re looking at repaying in 5.5 years.

If you pay off that debt with the funds from a $30,000 personal loan, borrowed at a 10.00% rate and repaid over a five-year term, you’d save more than $11,000 of interest during repayment, according to our debt consolidation calculator.

Depending on your loan agreement, you also could lower your monthly payment and pay down the debt faster.

Debt in the form of a personal loan is more convenient, too. It would entail one monthly payment to one lender and put an expiration date on your debt. The terms for personal loan repayment typically span two to five years.

Of course, a personal loan might not be right for you if you don’t have the credit score to receive a relatively low interest rate from a lender. In that case, you might be better off improving your credit, making debt payments as you can, and then reevaluating getting a personal loan or balance-transfer card down the road.

2. What will you do with the extra room in your budget?

If you have the credentials to apply for a personal loan, the next question is whether you trust yourself to use these new funds properly.

“It’s a question of willpower,” Ruttenberg said. “If you have confidence the funds will be used to either pay down the debt faster or to build your emergency fund, for example, then it can make sense.”

If, on the other hand, you might be tempted to misuse a personal loan, Ruttenberg said it would be wise to cut your expenses before borrowing. You also should adopt proper money habits and tighten your budget. Otherwise, taking on more debt in the form of a personal loan could worsen your situation.

Say you borrow that $30,000 personal loan, for example, and erase your credit card debt. All that effort could be for naught if you keep abusing the plastic in your wallet instead of focusing on repaying the loan.

A good alternative is to use your credit card solely to cover routine expenses, such as your electric bill. Then pay off your balance each month to avoid interest and help repair your credit score.

If you don’t trust yourself to stay on the wagon, you could resort to cutting up your card into pieces. That would force you to live only on the money in your bank account or wallet.

Using the extra room in your budget to pay off the personal loan and spending less on things you can’t afford — that’s the recipe for a successful debt payoff.

Is a personal loan right for you?

It’s so counterintuitive that it might drive you mad, but taking out a personal loan to repay past debt could make sense — especially if you were able to correctly answer Ruttenberg’s two questions.

But the CFP would pose one more question before recommending you sign on with a lender. Ruttenberg would ask about your end game or why you’re trying to erase debt before he would recommend a personal loan.

Maybe your goal is to become debt-free so that you can focus on buying a house, start saving for retirement, or put your child through school. Whatever’s driving you, let it serve as your North Star. Just don’t expect a personal loan to pave the way there with magic fairy dust.

“Taking the loan is a tool,” Ruttenberg said. “You still need to do the work, and to do the work you need motivation.”

If you have a student loan question you’ve been waiting for an answer to, contact our customer support team. Your question might end up in this column.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.