Unlocking Financial Freedom: 5 Reasons to Opt for Personal Loans in Credit Card Debt Repayment

Personal loans can help consumers consolidate their high-interest credit card debt and pay it off sooner. Personal loans often have cheaper interest rates than credit cards. Personal loans are also approved quickly, typically on the same business day, depending on the lender. According to Daren Blonski, managing partner of Sonoma Wealth Advisors in California, some customers may find it beneficial to transfer high-interest debt from credit cards to personal loans because the rates on personal loans can be significantly lower than credit card rates.

“Additionally, having your debt consolidated helps with managing and focusing on paying it off,” he stated.

There are at least five reasons a personal loan can help you pay off credit card debt faster:

• Lower interest rates.
• Consolidated payments.
• Defined debt-free date.
• Improve your credit score.
• Pay down other debts

1. Lower Interest Rates

According to Federal Reserve data, the average 24-month personal loan interest rate was 9.50% in May, with credit card interest rates at 14.52%.

Obtaining a personal loan allows a consumer to pay off all of their credit card debt, resulting in just one charge each month and saving hundreds of dollars in interest.

If you want to take advantage of today’s cheap interest rates, visit the online marketplace Credible. You can use their free web tools to calculate your rate. A single personal loan might help a client repay many credit cards.

For example, if a consumer owes $12,000 on three credit cards with an average interest rate of 17%, the minimum monthly payment would be around $300 (assuming the cardholder pays 2.5% of the balance each month), according to Jim Triggs, CEO of Money Management International, a nonprofit debt counseling organization based in Sugar Land, Texas. If a consumer merely made the minimum payments, it would take 335 months (almost 28 years) to pay it off. The consumer would pay more than $15,000 in interest on the amount.

Instead, if a customer took out a personal loan to pay off $12,000 in credit card debt at a 9.50% interest rate and a 24-month term, they would repay the loan in 24 months by paying $551 each month plus around $1,224 in interest.

“You can see how much the interest rate and larger payments impact the cost of borrowing $12,000,” Triggs stated. Credit cards charge a percentage of the balance, computed monthly using the current month’s balance. This means the amount fluctuates, but if there are no new charges each month, the payment decreases month after month. This is a major reason why it takes so long to pay off high-interest credit card debt, according to Triggs.

A personal loan can help you pay off your credit card amount sooner, according to Leslie Tayne, a debt relief attorney in Melville, New York. Consumers should avoid using credit cards to supplement their income and should not use them once they have been authorized for a personal loan.

2. Consolidated Payments

A debt consolidation loan combines many monthly debt payments into a single monthly payment. This strategy can assist a client in consolidating their personal funds into one.

“Now is an ideal time to look for competitive consolidation loans to save on interest and make better progress toward debt repayment,” said Bruce McClary, a spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit. “Having fewer accounts to keep track of can make it easier to manage a budget and control debt,” he stated.

Credible offers personal loans from a variety of lenders. Credible provides current personal loan interest rates.

3. Defined Debt-free Date

A personal loan’s repayment conditions provide the consumer with a specific date by which they will fully repay their obligation. Reaching that deadline might be a great relief and a step toward financial freedom for borrowers.

McClary stated that because credit card issuers allow users to add to the debt they are attempting to pay off, accurately projecting revolving debt payoff dates is challenging.

“Credit card payoff dates are often a moving target,” he stated. “A closed-end loan only moves in one direction, which makes it easier and more motivating to stay focused on the goal of becoming debt-free.”

Credit card interest rates are frequently changeable, so having a fixed interest rate “can often be helpful for controlling and projecting payoff timelines,” Blonski explained.

Consumers looking to consolidate their debt can do so by visiting an online marketplace like Credible and exploring personal loan choices.

4. Improve Your Credit Score

As individuals repay their credit card debt, their credit score can improve. The credit usage ratio refers to how much debt is being used. Consumers who pay off their credit card debt and avoid adding new purchases to the card will improve their credit scores, as it accounts for 30% of their FICO score.

Tayne explained that one reason to use a personal loan is because it is not included in a consumer’s credit utilization percentage.

“This shows lenders how much revolving credit is being used in relation to their total available credit,” she stated. “When consolidating credit card debt into a personal loan, the utilization is lowered, which can boost a credit score.”

Personal loans can help enhance a credit mix, which is the number of loans mentioned on a credit report.

“Lenders like to see that an individual can handle different forms of debt responsibly, which is why a diversified credit mix can increase scores,” she stated.

5. Pay Down Additional Debts

The money saved by paying a lower interest rate can be applied to other debt, such as college loans or vehicle loans.

“Personal loan funds are provided as a lump sum to borrowers, so consumers aren’t limited to consolidating one form of debt, unlike most credit card balance transfers,” Tayne stated.

Sticking to the personal loan repayment schedule is critical because failure to do so may result in a poorer credit score for the borrowers. Consumers must also exercise discipline and refrain from using previously paid-off credit cards, according to Triggs.

“This is one of the biggest pitfalls to paying off credit card debt with a personal loan,” he stated. “If one obtains new credit card debt while paying off the personal loan, it could put them in a much worse position than they were in prior to getting the personal loan.”

Final Words

Finally, personal loans provide a smart alternative for addressing high-interest credit card debt efficiently. When utilized wisely, they offer lower interest rates, consolidated payments, set payoff dates, potential credit score improvements, and the flexibility to pay off additional obligations, paving the way for financial stability and debt-free living.