Paying off a high balance on credit card can be challenging. Credit cards usually have a rather high interest rate as well as a revolving term. When you review your credit card statement closely, you may see a section that tells you how long it will take to eliminate the outstanding balancing making only minimum payments. For many people with a high credit card balance, this timeline may extend for 10 or 20 years or longer. This can be discouraging, and you may easily feel as though you may never reach your financial goals with so much debt looming over your head.
If you are looking for a better way to pay down your credit card balance and to ultimately eliminate this debt, you may be thinking about applying for a personal loan. You may even be able to consolidate multiple credit card balances through the use of a personal loan for added benefit. An unsecured personal loan through a credit union or your preferred bank may be used for this purpose, but you must meet the bank’s lending requirements. The actual loan terms, such as the interest rate and loan amount, are usually dependent on your personal factors. This may include your credit history, your verifiable income and other factors.
Keep in mind that some banks and financial institutions have a lengthy and stressful loan process. Before you walk through this process, it is important to determine if the use of a personal loan for credit card debt reduction is a smart idea. A closer look at the pros and cons associated with using a personal loan for this purpose is in order.
Benefits of Refinancing Credit Card Debt With a Personal Loan:
In most cases, the interest rate on a personal loan will be dramatically lower than the rate on your credit card accounts. Because of this, using a personal loan for this purpose can help you to save money on interest charges for the entire time that you carry the debt. This combined effect with the use of an installment term rather than a revolving term can result in savings on interest charges as well as a faster rate of debt reduction. Using a personal loan calculator online can help you to determine the actual savings that you may enjoy through this process.
Because a personal loan may have a fixed interest rate and a set monthly payment, you may find it easier to manage your budget with a personal loan. A fixed payment may be beneficial to an adjusting credit card payment that varies each month. You may even find that you can reduce your total credit card monthly payments while also paying the debt off more quickly. The actual benefits, however, will be dependent on your current debt balances, your current interest rates and the loan terms that you are approved for.
Drawbacks of Refinancing Credit Card Debt With a Personal Loan:
When you cannot qualify for a lower interest rate or a high enough loan amount to cover your outstanding debt balance, the benefits of using a personal loan are significantly reduced. The use of an online calculator is important if you want to determine interest rate savings and the fastest overall method for debt reduction. Keep in mind that personal loans have loan fees and charges as well, so the use of a personal loan is not without additional costs.
After you transfer your credit card balances to the new loan, your credit card balance will be entirely freed up. Some people may be inclined to use this balance to make additional charges. This could potentially make your debt situation more severe than it currently is. A smart idea is to close all accounts except one. You can also ask your credit card company to reduce your available credit limit.
There is also a chance that you may be able to pay off one of your smaller account balances faster in its current format than by consolidating it to a personal loan. Remember that the personal loan’s monthly payment will not decrease as you reduce the outstanding balance in the same way that a credit card’s minimum monthly payment would decrease.
Making Your Decision:
When you are stressed by high credit card account balances, you must handle your financial situation carefully. In some cases, it is immediately clear that you should or should not roll the debt into a personal loan. However, if you are unsure about the best option, carefully crunch the numbers using an online calculator to make an informed decision about how to proceed.