For student loan borrowers with high-interest debt, refinancing may be a good option to save money on interest. But if you’re also battling credit card debt, student loan interest rates might be the least of your problems. Credit card interest rates can vary widely, but they can easily be in the double digit —close to 20 percent.
If you are battling credit card debt, there is an alternative that can help save you money on interest and consolidate your loans: a personal loan.
What is a personal loan?
Personal loans, also known as unsecured loans, can help you fund a large expense or consolidate debt without requiring the use of collateral. This is different from a secured loan, where you might use your car or house as collateral for the loan. In the event of default, lenders can use collateral to recoup their money (for example, by repossessing a car or, in the case of a house, foreclosure).
Because personal loans are unsecured and don’t require collateral, they typically have higher interest rates than secured loans. However, personal loans offer much better interest rates than a credit card. Depending on your creditworthiness, you may be able to get an affordable interest rate.
When should you use a personal loan?
A personal loan can be used for a variety of things—unlike a student loan or a mortgage, a personal loan can be used for personal reasons at your discretion. Personal loans can offer access to capital, but they vary widely from something like a payday loan.
A payday loan is generally for short-term fixes. The money is available quickly, and the repayment terms have sky-high interest rates. By contrast, personal loans are generally used for long-term purchases, like debt consolidation or home repair, and they have much lower interest rates, making them an attractive option for those needing substantial capital.
But in the end, a personal loan is still a form of debt and should be used carefully. It shouldn’t be used to fund that dream vacation or a wedding (though research on the web will tell you otherwise). Saving up cash for those purchases is a much smarter option.
One of the best ways to use a personal loan is to consolidate high-interest credit card debt. Some credit cards have sky-high interest rates ranging from 10 to 20 percent or more.
Depending on your credit, you could get a personal loan for as low as 4.04%, pay off your credit cards, and have a new loan at a much lower interest rate. Considering that the average household has $7,281 in credit card debt, that could amount to a huge savings in interest.
Let’s say you have $10,000 in credit card debt at an 18% interest rate. If you consolidate with a personal loan of $10,000 at a 7% interest rate, over a repayment term of 24 months you could save $1,236 in interest.
Certified Financial Planner and financial coach Adam Hagerman says, “The majority of personal, unsecured loans I see are for debt consolidation. In my opinion, it’s one of the only reasons to consider a personal loan.”
While Hagerman believes a personal loan can be a good idea for debt consolidation, he also recommends looking at how you got into debt in the first place so you can treat the root cause of the problem. While it may seem like a personal loan is a great way to pay off credit card debt, you’re still taking on debt to pay off debt.
It’s crucial to understand why you got into debt. Was it a spending issue? A cash flow issue? Or an income issue? By tracking your income and expenses, you can identify the root cause so you extricate yourself from consumer debt.
Which banks offer personal loans?
If you’re thinking of taking out a personal loan to consolidate credit card debt, be sure to do your research on the terms of the loans as well as the interest rates. The interest rate you are offered will vary depending on your credit score and income. Obviously, you want to get a much better rate than your credit card in order to save on interest. Here a few companies that offer personal loans.
Like Earnest, Upstart also has a flexible underwriting process that considers education, income and job history along with credit history. It can be a great choice for smaller loans, too. Borrowers can get loans as small as $1,000.
- Loan amounts from $1,000 to $50,000
- Minimum FICO score required: 640
- Flexible underwriting and credit requirements
- Fast application process
SoFi, which began as a student loan refinancing company, has recently started offering personal loans as well, with some of the best rates in the industry.
- No fees
- Has repayment terms of 3, 5, or 7 years
- You can borrow between $5,000 and $100,000
- No minimum FICO score, but typically requires 680+
- Offers unemployment protection so if you lose your job, you can postpone your payments.
Payoff is a financial empowerment company designing products to help people make smart decisions about spending and saving. Their flagship product, the Payoff Loan™, empowers Payoff Members to pay off high-interest credit card balances at a lower rate and in a shorter term. They simplify the process so you get out of debt faster and save money.
- Loan amounts: $5,000 and $35,000
- Minimum FICO score required: 640
- No application, prepayment, or late fees
- Offers repayment terms of 2, 3, 4, or 5 years
- The Member Experience Team answers questions and empowers Members toward financial success.
- Starting an application won’t affect your credit score
Citizens bank is a trusted financial institution that offers and affordable personal loan. It has no loan fees. And Citizens Bank offers two different interest rate discounts that combined lower the personal loan rate by .50%.
- Loan amounts from $5,000 – $50,000
- Minimum FICO score required: 680
- Trusted bank with a nearly 200 year history of servicing customers and communities
- Fixed and variable rate options available
- No origination, application or disbursement fees
- Borrow from $1,000 – $40,000.
- Rates from 6.16% to 35.89%* APR. Best APR is available to borrowers with excellent credit.
- Flexible Loan Terms.
- Fixed Rates and Payments – Your payment will not change for the life of your loan.
- No Prepayment Penalties – Pay off your loan at any time without fees.
- Simple and Secure – Check your rate without hurting your credit score.
- Fast – Apply in minutes and receive your money in as few as 5 days.
- No Hidden Fees
- No Collateral Required
- Good Credit Required
Earnest is an online lender that offers personal loans with a flexible underwriting process. In addition to having no minimum FICO score, they also consider factors like savings, income, and earnings potential to determine loan approvals and offers.
- Loan amounts from $2,000 to $50,000
- No minimum required FICO score
- Response to loan application in about 2 days
- No fees, hidden or otherwise
- Interest rate discount with autopay
A personal loan can be a valuable tool for paying off high-interest debt, but make sure it’s beneficial for you and saves you money in the long run. If you are thinking of using a personal loan for anything else, consider budgeting and saving for it instead.
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|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|5.99% – 24.99%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|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|