Home > Personal Loans > The Most Underutilized Debt Payoff Tool

Comments 0 Comments

Getting out of debt, particularly consumer debt, is the cornerstone of financial freedom. It frees up cash for saving and investing. It enables us to get off the treadmill of living month-to-month. And being debt-free just feels great.

A lot has been written on how to get out of debt. It’s not exactly rocket science. Almost all advice on this subject can be boiled down to three things: 1) stop going into more debt; 2) pay off high interest debt first; and 3) put as much toward your debt as you reasonably can. To be sure, there is some debate here. Some argue you should pay off small loans first as a way to stay motivated. But the basic approach to getting out of debt remains the same.

There is one debt payoff tool, however, that is often overlooked—personal loans. It may seem odd to use new debt to get out of old debt. Indeed, there are some risks to this approach. If used correctly, however, personal loans can lower your interest payments and shorten the time it takes to become debt-free.

Here are five things to consider before using a loan to pay off existing debt.

1. Interest Rates

Refinancing existing debt to lower the interest rate is the closest thing to a free lunch in the world of personal finance. A lower interest rate reduces the amount of interest paid and, assuming the term of the loan is the same, also reduces the monthly minimum payment. Refinancing existing debt with a lower-rate personal loan is a smart way to accelerate debt repayment.

2. Term of the Loan

Care must be taken to make sure the term of a personal loan is consistent with your budget and goals. If a personal loan has a shorter term than existing debt, monthly payments may be more than your monthly budget can support. At the same time, greatly extending the term of a loan can result in more interest paid over time.

3. Consolidation

The key to using personal loans as a tool to getting out of debt is achieving lower interest rates (as noted above). While this can include consolidating multiple debts into a single new loan, consolidation by itself is not beneficial. It may reduce the number of monthly payments that must be made, but if the new loan comes with a higher interest rate, the added convenience may not be worth the cost.

4. Collateral

Personal loans are typically unsecured debt. In some cases, however, lower interest rates can be obtained through secured loans, such as a home equity line of credit. While this is a reasonable option in some cases, it’s important to understand that failure to pay a home equity line of credit could result in the foreclosure of your home.

5. Where to Start

For those considering a personal loan, there are several options to consider. First, a 0% balance transfer credit card offers arguably the best terms available. There typically is a balance transfer fee of 3%, but the best balance transfer cards today offer the 0% terms for up to 18 months.

When it comes to getting a personal loan, having a higher credit score will get you access to lower interest rates. Before you apply for a personal loan, it can help you to know where you stand, credit-wise, so you can look for the best rates within your credit range. You can see your credit scores for free, updated every month, on Credit.com.

More on Managing Debt:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team