Learn how to use a personal loan to pay off your credit cards and get yourself out of crippling debt faster.
Sourced from: www.businessinsider.com
Although it may seem counterintuitive, there are situations when taking out a personal loan to pay off credit card debt is a great option. It’s important to know exactly how to use the personal loan, though, and to maximize your debt consolidation so that you reap the most longterm benefits.
If you do decide to take out a personal loan to pay off credit cards, make sure you don’t fall into the same spending habits that got you into debt in the first place. Figure out a workable budget and take the following steps to pay off your high-interest rate credit cards with a new personal loan.
How to use a personal loan to pay off your credit cards
1. Review your current debts and interest rates
The first thing you need when working on any payoff plan is a good list of all of your debts. Create a list of every credit card you have with its balance, interest rate, and minimum monthly payment if you don’t already have one. This tells you what you need to pay off, the total minimum payments you have each month, total balances across all cards, and other useful information you’ll need later on.
If you want to pay off your debt the old-fashioned way, by making payments on the credit cards, you can use this list to create a debt snowball or debt avalanche plan. But if you want to consolidate all of those credit cards with a personal loan, you need the same information readily available.
2. Look for balance transfer options at a lower rate
When paying off one loan with another, there is one hard rule you should never break: only transfer a balance to a loan or credit card with a lower interest rate. As long as you do that, you should end up saving money in the long run. If you move to a loan with a higher interest rate, you’ll end up paying more.
There are many places you can find a personal loan. A new crop of online lenders makes this type of loan very fast and easy. You can also look to peer-to-peer lending marketplaces to get your loan funded by a group of investors. If that new loan has a lower interest rate than your credit cards, you should think about moving forward with the consolidation.
3. Pay off your old cards with loan proceeds
When you are approved for your loan, you might get the proceeds as a check or lump cash deposit in your bank account. Don’t let that big number tempt you to spend on anything other than your credit card payoff. Otherwise, you are just putting yourself in more debt that you’ll still have to pay off later.
As soon as the funds clear, pay off every single credit card in full. Use your bank’s online bill pay, send a check, or pay at your credit card website. It doesn’t matter how you do it as long as you pay them off quickly to stop new interest charges. Once paid off, put your cards in the back of a drawer so you’re not tempted to overspend on them again.
4. Put yourself on a debt freedom schedule
This type of debt consolidation has three major benefits:
- Only one monthly payment instead of several
- Lower interest costs
- Debt freedom date locked in
Once you pay off your loan, you may find yourself completely debt free. If you have any student loans, auto loans, or mortgage loans, at least your highest interest debt should be taken care of. Take this opportunity to avoid getting back into any new debt in the future.
A personal loan typically comes with a fixed monthly payment for a certain period of time. If every payment is made on time for the life of the loan, the balance will be zero at the end and you won’t have any credit card debt leftover to worry about.
5. Conquer your debt for good
When you have monthly debt payments, you don’t have a choice about what to use that money for. Every payday, a chunk of your income is already spoken for. When you pay off those debts, you can choose if you want to use that money to save, invest, or for something else.
Consolidating your credit card debt to a personal loan does not always make sense, but if you can find a lower interest rate and put yourself on a debt freedom plan, it can be a great idea. When you can save money and get out of debt sooner with a personal loan, you should seriously think about going for it.