If your holiday debt is much higher than expected, you may be inclined to apply for a balance transfer credit card as a way to mitigate the interest. But there’s another financing option that could help you get debt free as well: combining several unsecured debts into a single, personal loan.
The Pros & Cons of Personal Loans
Personal loans are installment loans, like a mortgage or auto loan — you pay the debt back by making a set payment over a specified period of time. They may be helpful to consumers who are juggling high interest credit card debt on multiple cards since it can be simpler to make one payment a month instead of four or five (You can use the personal loan to pay off the credit card debt). And, depending on your credit score, personal loans can also have a more favorable interest rate than your plastic. Moreover, because personal loans have a fixed term (usually three to five years), they come with a built-in plan for paying off debt. If you pay your loan as agreed, when its term is over, you’ll be debt-free.
Of course, there’s a trade-off there. You’ll be locked into the monthly payment, so any financing you are thinking of taking on will need to be well within your budget. (You’ll want to avoid missing a payment, potentially incurring fees and subsequently damaging your credit score.) And, if you are using the loan to consolidate credit card debt, it’s in your best interest to put your credit cards one ice — you don’t want to sabotage your debt repayment plan by running up new balances as you’re paying back your personal loan.
Here are a few other to-dos if you’re thinking about applying for a personal loan.
1. Know Your Credit Score
You generally need to have good or excellent credit to qualify for a competitive personal loan, as terms and conditions will be determined by creditworthiness. Good credit typically means scoring a low interest rate; poor credit could mean you won’t even qualify.(Underwriting is also generally based on your annual income as well as your debt-to-income ratio.) You can see where your credit stands by viewing your free credit report summary, updated each month, on Credit.com.
2. Check Your Credit Report
You’ll also want to get copies of your credit report from the three major credit reporting agencies to check for any discrepancies that you need to clear up. Errors, such as a old, paid-off debt collection account, could be dragging down your score, making it harder for you to get an affordable personal loan. You can pull your credit reports for free each year at AnnualCreditReport.com. If you find an error, you can dispute it with the credit bureau in question (Equifax, Experian and Trans Union).
3. Shop Around
Loan applications typically generate a hard inquiry on your credit report, which could lower your score by a few points. So it’s a good idea to do your research ahead of time and only apply for loans that offer competitive rates that your credit is likely to qualify for. A financial institution where you already have checking and/or savings accounts may be a good place to start your search since some banks offer discounts on loan interest rates to existing customers. You may also want to speak with a loan specialist who can explain the minimum credit score and other requirements needed to qualify for a personal loan.
More on Managing Debt:
- The Credit.com Debt Management Learning Center
- How to Pay Off Credit Card Debt
- 5 Tips for Consolidating Credit Card Debt
Image: Wavebreakmedia Ltd