Adam McCann, Financial Writer
You should get a personal loan to pay off debt if it will save you more money than the best balance transfer credit cards. Personal loans are better than balance transfers in a few situations. The first is if your credit is not good enough to get a balance transfer card. Balance transfer cards with 0% APRs generally require a credit score of 700 or higher. You may be able to get some unsecured personal loans with a credit score as low as 600 (though you won’t necessarily get good interest rates).
The second situation in which personal loans are better is if your debt is especially large. In that case, you may have trouble finding a credit card with a big enough limit to accommodate you. You also risk using up all of the card’s available credit for the transfer, which is bad for your credit score.
When comparing your options for paying off debt, consider the amount you need, potential APRs, minimum monthly payments, fees and more. If you decide to get a personal loan and are approved, you will receive a lump sum that you can use to pay off your old debt. From that point, you will owe the amount to the issuer of your new loan, ideally with cheaper payback conditions.
If you have excellent credit, you may be able to find loans with interest rates as low as 6%. But people with fair credit or worse might be charged as much as 36%. The average APR on a two-year personal loan from a commercial bank is around 10%, according to the Federal Reserve. Compare that to credit cards, which have an average APR of about 19% for new offers.
Most personal loan providers express their interest rates as a range, so you won’t know your exact interest rate before you apply. But many lenders offer pre-qualification so you can estimate your rate ahead of time. You can even use WalletHub’s pre-qualification tool to check multiple lenders at once.
When to get a personal loan to pay off debt:
- When it will save you money.
- When you need to consolidate large debts.
- When balance transfer cards aren’t an option.
If you get a personal loan to pay off debt, your balance won’t change much since you’ll be borrowing the amount you need to pay off the old debt. However, there may be fees. One common fee is an “origination fee” to process the application, which can range from 1% to 5% of the loan amount, according to Experian. This fee could be charged upfront, tacked onto the balance or deducted from the amount you receive at the beginning.
The most important financial consideration is the interest rate. Ideally, your new loan’s rate will be significantly lower that what you’re paying on the current debt. That way, you’ll be able to pay it off much faster. But if a loan requires a drastically higher monthly payment than you’re already making, you will have to determine if you can afford it.
The Best Alternative: Balance Transfer Credit Cards
Balance transfer credit cards are one of the best ways to pay off debt because the best offers give you 0% interest on your balance for 12 - 21 months. When you do a balance transfer, the issuer of the card pays off your old debt and moves that balance to the card. After any introductory 0% interest rate finishes, you will owe interest on the remaining balance at the card’s regular APR. And each month, even during 0% periods, you will need to make a minimum payment.
There are a number of other solutions for paying off debt, such as settling with the lender or working out a payment plan. So give them a look as well before you decide on anything.
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