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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%.
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!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000|
|6.26% – 14.87%1||$5,000 - $100,000|
|6.99% – 35.97%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|4.99% – 29.99%3||$10,000 - $35,000|
|5.99% – 18.99%4||$5,000 - $50,000|
|15.49% – 34.49%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|