Looking for a budget rescue? A personal loan could be the answer
When you’re lugging around high-interest debt, you know how stifling it can feel. Worse, when you have a wallet full of maxed-out credit cards, a payday loan, or some other type of debt with a sky-high interest rate, it becomes harder to get out of nowhere.
Most personal loans can be used for any purpose you want — from installing a spa-like bathroom in your home to covering your child’s wedding expenses. One of the best forms of personal credit is a debt consolidation Loan. This is how it works:
- You add up how much you owe on high-interest loans, credit cards, and other debt.
- You apply for a personal loan for this amount. If approved, most lenders will deposit the proceeds directly into your checking account. Some lenders pay off the high-interest debt directly on your behalf.
- You pay fixed monthly installments until the loan is repaid.
The real advantage
Let’s say you have four credit cards with balances of $5,000 each. The average interest rate for each card is 17%. That means you owe a total of $20,000 at 17% interest. Between the four cards, your minimum monthly payment is likely to be around $600. If you continue to pay the full $600 a month, it will take 46 months to fully pay off the debt and you will pay $7,259 in interest.
Now let’s say you have good credit and you get a personal loan with a interest rate from 8%. If you continue to make a monthly payment of $600, it will take 38 months to repay the loan and you will pay a total of $2,694 in interest.
If you’re struggling to make the minimum monthly payment, consider a longer loan term. You will pay more interest over the life of the loan, but your monthly payment will be less. For example, if you extend the loan term to 60 months, your payment drops to $406 and you pay a total of $4,332 in interest.
It pays to look for the best interest rate and term. That means taking the time to contact at least three lenders. Most lenders do a “soft” credit check before telling you if you’re eligible for a loan and what the interest rate and terms will be. A gentle credit check means there is no impact on your credit score. Only when you decide on a specific lender will they carry out a tough credit check. Although a tough check will hurt your credit score a bit, it will recover after you make a few payments on time.
What to look out for
This may sound counterintuitive, but the lowest interest rate isn’t always the best loan. That’s because some lenders charge expensive fees that do little but increase the price of the loan. For example, some lenders charge a setup or administration fee. If you have good to very good credit, there is absolutely no reason to accept such a loan.
When a lender tells you that your application has been approved, be sure to ask about any fees included with the loan. And don’t just take someone’s word for it. Read the loan document carefully before signing it.
if you have one low credit rating, your credit options may be more limited (and you may have to pay a processing fee). However, if you are trying to get out of high-interest debt like a payday loan, chances are you can get a lower interest rate with a personal loan.
If you find yourself spinning your wheels while trying to get out of debt, a personal debt consolidation loan may be just the budget rescue you’re looking for.
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