A few years ago, I was walloped with medical bills. I didn’t qualify for a hospital payment plan and the bills exceeded my savings, so using credit cards were my only option.
Soon, I ended up with thousands in debt and was paying 14% in interest. The high rate made it more difficult to pay down my balance and get ahead.
I paid off my credit card debt using a personal loan — with a much lower interest rate of 8% — so that more of my monthly payments went toward the debt’s principal amount, rather than interest. If I keep on my current payment schedule, I’ll pay off my debt five years earlier than if I had stuck with the credit cards.
If you’re struggling with debt like I was, you might have heard about consolidating your debt with a personal loan. But what is a personal loan, and how do you get one?
What is a personal loan?
Personal loans can help you fund a large expense or consolidate debt. You can use them for almost anything you want, such as a big wedding or home renovations. However, many lenders don’t allow you to use a personal loan for education expenses.
Personal loans are unsecured debt, meaning that you can take out a loan without offering collateral. That’s a big difference from secured debt, such as a car loan. If you fall behind on your payments with a secured loan, the lender can seize the collateral — such as your vehicle — to recoup their money.
Because personal loans have no collateral or guarantee behind them, they typically have higher interest rates than secured loans. However, personal loans usually offer better interest rates than credit cards.
When should you use a personal loan?
Although personal loans tend to have lower interest rates than credit cards, they’re still a form of debt and should be used carefully.
Borrowing money to pay for a luxurious vacation or a big purchase can be a costly mistake. It’s often better to delay the expense until you can save enough to pay for it in full.
However, personal loans do have their uses. If you have high-interest credit card debt, they can be a big help.
Adam Hagerman, a certified financial planner, said using personal loans to better manage credit card debt is common. “The majority of personal, unsecured loans I see are for debt consolidation,” he said.
A personal loan can help you save money and pay off your debt sooner through a process known as debt consolidation. You take out a personal loan for the amount of your credit card debt and use it to pay off the balance. Rather than making payments on the credit card, you’ll have just one easy payment for your personal loan.
Even better, using a personal loan to consolidate your credit card debt can be a smart way to save money. “In my opinion, [consolidating credit card debt] is one of the only reasons to consider a personal loan” said Hagerman.
According to the Federal Reserve, the average interest rate for credit cards is over 13.0%. However, it’s not uncommon to pay closer to 15.0% on a credit card.
According to our Credit Card Consolidation Calculator, if you have two credit cards, with a total balance of $10,000 and you only made the minimum payments, it would take about six years to pay off the card. Plus, you’d pay back $15,600.
If you took out a three-year personal loan with a 7.0% interest rate and used it to cover your credit card balance of $10,000, you’d pay back just $11,116 in total. That’s a savings of $4.484 — and you’d be debt-free sooner.
Although 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.
It’s crucial to understand how and why you accrued debt. Was it a spending issue? A sudden emergency? An income issue? By tracking your income and expenses, you can identify the cause and finally end the debt cycle once and for all.
How to take out a personal loan in 5 easy steps
If you’ve decided that a personal loan is a smart option for your situation, here’s how to apply for one:
- Check your credit score: Most lenders will look at your credit history as part of your application. The better your credit score, the lower the interest rate on your loan. Knowing your score ahead of time will help you avoid any surprises.
- Compare lenders: Come up with a list of lenders that offer the best personal loans for your credit. If possible, get an estimate from each to find out what interest rate you qualify for and possible repayment terms. By looking at multiple lenders, you can ensure you get the best deal.
- Collect necessary documents: When you start the application process, the lender will ask for documentation of your income, your driver’s license number, and your Social Security number.
- Complete the application: Many lenders allow you to complete the application process online. However, you can also visit your local bank or credit union in person to apply for a personal loan. In either case, the lender will walk you through the application process.
- Receive a decision: In most cases, you’ll get a decision from the lender within minutes. If you accept the loan, you can receive the money in just a few days.
Personal loans are great (sometimes)
What is a personal loan and why are they so attractive? They’re appealing because they offer a lower-interest way to make a big purchase. However, they’re still a form of debt and should be used with caution.
If you’re ready to kick your credit card debt to the curb, this credit card consolidation guide can help you tackle your debt today.
Melanie Lockert contributed to this article.
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|