Using your personal loan to pay off a high-interest loan is a smart move.
Not only will you be able to save money on interest, but you’ll also simplify your finances by having just one loan to worry about.
Taking out a personal loan to pay off a high-interest loan is one of the most straightforward ways to reduce several monthly high-interest card payments and combine them into one monthly personal loan payment.
In this post, we’ll talk about how you can use a personal loan to pay your high-interest debt and save money on interest.
- 4 Advantages of using a personal loan to pay off a high-interest loan
- Get The Loan Comparison Calculator
- 3 Disadvantages of using a personal loan to pay off a high-interest loan
- How to choose the most suitable personal loan to pay off a high-interest loan
- Frequently Asked Questions
4 Advantages of using a personal loan to pay off a high-interest loan
Short-term loans may be useful if your aim is to get out of debt faster than if you paid your high-interest loan on time.
However, there are several benefits to taking out a personal loan to pay off another loan:
1. You might be able to pay off your high-interest loan sooner
If you only make minimum monthly payments, it might take years or even decades to pay off a high-interest loan if you pay off the principal gradually.
A low-interest personal loan will let you pay off your debt and establish a payment plan for your personal loan.
The conditions will differ depending on how much you borrow and your lender.
If you had a 10-year plan to pay off your high-interest loan, you may get a personal loan with fair interest and have it paid off in less than 5 years.
Just make sure you don’t restart the cycle by accumulating another debt.
2. You can Improve your credit score
A personal loan may have a beneficial effect on your credit score in a variety of ways, whether or not you take out the money.
Borrowing in your own name improves your credit mix, which accounts for 10% of your score.
When you have a lot of credit and debt, it indicates that you’re a responsible consumer to creditors and lenders.
By paying down your debt, you will be able to lower your credit utilization.
Your credit utilization is the proportion of accessible credit you’re utilizing against your existing debt.
If you pay off your credit cards, your utilization rate will be 0%.
A utilization rate of 30% or less is considered good and can boost your score, as long as it’s below 10%.
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3. Streamlining Payments Through Consolidation
Tracking all due dates and minimum balances owing might be difficult if you make numerous payments each month.
You may be charged late payment costs if you miss a payment or don’t pay at least the outstanding amount owing, and your credit score could take a hit as a result.
Taking out a personal loan to combine high-interest loans payments will save you time and money by eliminating the need for any monthly payments.
You may save time and space by reducing or eliminating the number of payments.
4. You may save money by borrowing at a lower interest rate
If you have a high-interest loan (such as a credit card), you may be charged a rate of 20% or more, but those with excellent credit might pay less than 12%.
While an unsecured personal loan has an average interest rate of around 9%, a secure personal loan is less than 10%.
If you have a decent credit score, your personal loans will be less expensive than those with poor credit.
Because you’ll be paying less in interest, this means you may save money on interest by half or even pay off your debt sooner.
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3 Disadvantages of using a personal loan to pay off a high-interest loan
1. Personal Loans Have Fees
Lenders charge a variety of costs, including late payment fees, origination fees, and lack-of-funds penalties.
Take notice of this when comparing personal loan lenders.
2. You aren’t always offered a lower Interest Rate
Personal loans usually have a lower interest rate than credit cards, but this may not be the case for everyone.
If your credit isn’t excellent, you won’t be able to guarantee a lower interest personal loan.
If you qualify for a personal loan with bad credit, your interest rate may or may not be lower—and it could be higher.
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3. Taking out a personal loan may lead to additional debt
If you take out a personal loan to pay off your high-interest debt and then accumulate more debt, you’re creating extra debt.
High-interest loan consolidation loans aren’t a debt reduction; only use them as a last resort, such as increasing your monthly payments.
How to choose the most suitable personal loan to pay off a high-interest loan
There are numerous different personal loan lenders that charge variable & fixed interest rates and costs, as well as varied repayment timeframes.
There are no specific personal loan requirements, so you may receive a diverse number of bids depending on your needs.
Consider these 4 factors while researching personal loan alternatives:
1. Personal loan terms
Depending on the lender, your repayment terms may be quite different.
Repayment terms for some loans are as brief as 6 months, while others last anything from 5 to 7 years.
Find a lender that offers shorter repayment terms if you wish to pay off your high-Interest loan sooner.
If you need to keep your monthly payments lower look for a lender with longer repayment terms.
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2. Personal loan Interest rates
The greatest personal loans will provide the lowest interest rates to those with excellent credit.
Lower credit scores result in larger monthly payments and lower interest charges over the lifetime of your loan.
3. Personal loan Fees
The higher your credit score, the more loans you might qualify for that don’t charge origination or other fees.
If you have terrible credit, look into each lender’s expenses and choose which ones you’re willing to pay if necessary.
As an example, Is the penalty for late payment $20 or $30?
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4. Loan amount
Some individuals don’t require much money to pay off their debts, while others do.
The amount you may borrow is determined by a number of factors, including the APR and your credit score.
Your credit score is how lenders evaluate your trustworthiness. The higher your credit score, the more trustworthy you seem to lenders, allowing you to borrow more.
Frequently Asked Questions
Yes, in most cases. Although you may frequently use one loan to pay off another, read your agreement thoroughly and be cautious about your spending habits.
Personal loans have variable interest rates and duration, but the maximum interest rate for a personal loan is 36% depending on the borrower’s credit score and financial history.
Abdulrahman is the founder of Financeive and a financial advisor with +3 experience writing about loans and debts. He took the Nanodegree from Udacity with a degree in Business Administration and had previously finished his bachelor’s degree in Accounting as well.
He is an expert on Personal Finance who knows how to make sure that your finances will not hold anyone back anymore – even if they are struggling with paying off previous debts or just starting their life financially alone as a young adult without much income yet but lots of potential opportunities ahead.
He used to help Individuals and Small Businesses to get loans with low interest and has figured out ways to help most of them to get out of loans Debt.