In 2016, I had a medical emergency that landed me in the hospital for days. It was scary and stressful, but the worst part wasn’t being ill — it was the medical bills that started pouring in afterward.
Out of money, I ended up paying my medical bills with credit cards, racking up approximately $20,000 in debt spread across several cards. With the high interest rates on my cards — some as high as 15.00% — my debt kept growing. I felt like I was drowning, and even looked into declaring bankruptcy.
Thankfully, I found a strategy that worked for me: I took out a loan with a much lower interest rate to pay off the debt. With a lower rate, more of my payment went toward the principal, helping me take charge of my debt and pay it off faster.
If you’re struggling with credit card debt like I was, debt relief loans can be a huge help. However, they’re not for everyone and, in some cases, can make the problem worse. It’s important to understand both how they can help you and how they can exacerbate the problem before applying for a loan.
What are debt relief loans?
Debt relief loans, also known as debt consolidation loans or credit card consolidation loans, can help you manage your debt.
With a debt relief loan, you work with a lender to take out a loan for the amount of some or all of your credit card debt. You’ll complete a loan application and the lender will look at factors such as your income, total debt, and credit history to determine your eligibility.
If the lender approves you, the new loan will have a different interest rate and minimum payment than your credit cards, and you’ll have a set repayment term.
Once the lender disburses the loan to you, you can use that money to pay off all of your credit card debt. Going forward, you’ll make payments on your loan directly to your lender.
Your credit cards remain open after using a debt relief loan. You can still use them as you would normally, but keep in mind that you’ll need to make regular credit card payments for any new purchases you make.
5 ways a debt relief loan can help you
If you’re struggling with credit card debt, debt relief loans can help in several ways:
1. You might get a lower interest rate
According to the Federal Reserve, the average interest rate on a credit card is 13.16%. As I found out with my medical bills, an interest rate that high can make it difficult to dig yourself out of debt.
With a debt relief loan, you might be able to qualify for a lower interest rate. That means more of your payment will go toward the principal rather than interest, and you can save money over the length of your repayment.
In my case, I would have paid back nearly double what I originally charged thanks to interest. With $20,000 in credit card debt, a 15.00% interest rate, and a $350 minimum monthly payment, it would have taken me over eight years to pay it off. In total, I would have paid my credit card company $35,000.
I shopped around for a debt relief loan lender to find the best interest rate and terms and ended up applying for a loan with SoFi. When the company approved me, my new loan had an interest rate of 8.00%, significantly lower than the rate on my cards.
With my new loan, I’d pay back just $18,249 in total over a five-year period — a savings of over $16,000 just by using a loan to consolidate my credit card debt.
2. You can have a fixed monthly payment
With a credit card, your payments can vary from month to month. If you continue to use your card to pay for other expenses, your balance will increase. Interest charges can also cause your balance to grow.
As a result, your credit card company will adjust your minimum payment to cover a portion of the new charges and interest fees. Fluctuating payments can make it difficult to budget every month as you don’t know how much you’ll owe.
With a debt relief loan, you might be able to choose between variable and fixed interest rates. If you opt for a fixed-rate loan, your interest rate and monthly payment will never change during the repayment term. Knowing your payment ahead of time can make it easier to manage your budget and keep up with your bills.
3. You’ll have an exact payoff date
Credit cards are a form of revolving credit, meaning you can continue to use the card as long as you keep making your minimum payment and don’t hit your account limit. With revolving credit, the amount of remaining credit, your account balance, and your monthly minimum payment can change every month.
Because credit cards work this way, it can be difficult to identify a firm payoff date. As you make charges, it can change over time. For some people, that can make it feel like they’ll never get out of debt.
Debt relief loans address that by giving you an exact payoff date you can write down on your calendar. That payoff date is accurate as long as you keep up with your minimum payments. Knowing that your debt will be gone within a set timeframe can be a big motivator and keep you on track.
That was certainly the case for me. My fluctuating credit card balance made me feel hopeless and like I’d be in debt forever. But with my SoFi loan, I opted for a five-year term. Seeing my progress each month and getting closer and closer to my payoff date kept me focused.
4. You could save money
As I found out, a debt relief loan can be a great way to save money when you’re repaying debt. If you qualify for a loan with a lower interest rate or choose a shorter repayment term, the savings can be significant. You can get out of debt faster so you can then focus your efforts — and your dollars — toward your other goals.
You can find out how much you’d save with a debt relief loan with our Credit Card Consolidation Calculator:
Credit Card Consolidation Calculator
Before After Balance — — Rate — — Term — — Monthly — — Interest — — Balance — — Savings — —
5. You’ll have one easy payment
Many people juggle multiple credit cards to take advantage of rewards or access more credit. If you have a balance on multiple cards, keeping track of your different minimum payment amounts and due dates can be difficult. Managing multiple monthly payments might increase your risk of missing a payment, which would subject you to late fees and penalties.
With a debt relief loan, you can take out a loan for the full amount of your credit card balances. Going forward, you’ll have just one payment to remember each month. Simplifying your payments can make it easier to stay on track and avoid unnecessary fees.
Potential drawbacks to consider
Although debt relief loans can be useful tools for debt repayment, applying for a loan is a big decision. If you’re not careful, a debt relief loan can actually make things worse, not better. Here are three things to keep in mind:
- You might not save money: Not all debt relief loan borrowers save money. For example, you might not qualify for a lower interest rate or you might decide to extend your repayment period. A longer repayment means you’ll likely have a lower monthly payment, but you’ll pay more in interest over the life of your loan.
- You might need a cosigner: You need a solid income and credit history to get a loan. If your credit is less than stellar, you might need a cosigner — someone with a more stable income and better credit — to sign the loan with you. The cosigner is responsible for the loan payments if you fall behind, so it’s a big favor to ask of someone.
- You need a payoff strategy: Debt relief loans don’t eliminate your debt; they just change them to a different form. If you don’t make lifestyle changes, such as boosting your income or cutting back spending, you’ll continue to rack up credit card debt on top of your loan.
Finding a lender
If you’ve decided to move forward, it’s a good idea to compare offers from multiple companies that offer debt relief loans to find the best interest rate. Our personal loan marketplace can help you quickly compare loans and filter lenders by your top criterion.
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 6.16% to 35.89%. 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 time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. 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 or longer.
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||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|