Here’s a staggering number for you to digest: the total US household debt has now surpassed the $13 trillion mark to an all-time high of $13.15 trillion as of the end of 2017. That’s a huge number to comprehend and shows exactly how much debt the average person is tackling.
More than likely, you’re contributing to this debt load, which means you have your own financial obligations to meet. Between mortgage payments, credit card bills, car loans, and student loans, debt seems like it never ends. If you’re struggling with your own debt, you might be looking for ways to help you climb out of it so that you’re not stuck dealing with it for the rest of your life
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The good news is that there are several avenues you can take to tackle your debt. But what about personal loans? Can you take out a personal loan to pay down your debt?
The answer is yes, but if you choose this route, there are some considerations to make first.
Getting a Personal Loan to Pay Off Debt
Personal loans are basically loan products that are designed to give borrowers access to the money required to pay for any type of expense. They’re usually unsecured loans, which means you don’t have to put forth any collateral to get the loan. This is different than an auto loan or home loan in which a vehicle or home is used as collateral to secure the loan, respectively.
With collateral, the lender may repossess the asset if the borrower defaults on the loan. With an unsecured loan, there is no collateral for the lender to take back if you don’t make your payments, which makes personal loans riskier for lenders. In order to make up for this added risk, personal loans often come with a higher interest rate than secured loans in order to help offset any losses incurred by the lender if the borrower defaults.
Want to know what happens if you can’t afford to make your loan payments on time? Read this.
Personal loans can be a great way to consolidate or pay down your debt, but the key is to make sure that the interest rate on the loan is lower than the current dent you are trying to pay off. If the rate on the personal loan is higher, this situation would make little sense as you would actually be spending more money on a new loan.
However, if you can secure a much lower interest rate on a personal loan compared to your current debt, this arrangement might make sense. This is especially helpful with credit card debt since credit cards are notorious for their high-interest rates. For this reason, getting a personal loan to pay off credit card debt might be a great way to spend less on interest and pay off your debt faster.
In addition to credit cards, other high-interest debt that you may want to pay down using the funds from a personal loan may include:
- Medical bill debt
- Tax debt
- Payday loan debt
Although personal loans often come with higher interest rates than secured loans, they often offer lower rates compared to other types of debt, including credit cards and payday loans. That said, your interest rate will also depend on your credit score. The higher you score, the lower your interest rate will likely be.
As such, if you have good credit, you may be able to qualify for a personal loan with a lower interest rate. If you can secure a personal loan at a rate of 6%, for instance, to help you pay down your credit card debt with an 18% interest rate, you could realize significant savings.
Click here to learn how cancelling a credit card might affect your credit score.
A personal loan might be a great option if you currently have a ton of credit card debt. Usually, personal loans are only a good option if you have thousands of dollars of credit card debt since the majority of lenders have a minimum loan requirement of anywhere between $1,000 to $5,000.
What About Other Debt Relief Options?
Getting a loan to pay off debt is certainly a viable option if the numbers work for you, but it’s not the only option out there. You can take advantage of other methods to alleviate your debt if taking out personal loans for credit card debt isn’t right for you.
Here are a few other debt relief options you may want to consider if your debt is mounting and you’re struggling to manage it:
Consolidation loans. If you have a lot of debt on your plate that is tough to manage, you might want to consider debt consolidation as a means of settling your debt faster. Similar to refinancing a loan, debt consolidation involves taking out one loan to pay off all your other debt.
For some information about bad credit debt consolidation, check this out.
If you have a few credit cards, an auto loan, or payday loan, for instance, you can consolidate them all into one, easier to manage loan product, usually at a much lower interest rate. You can choose to consolidate all or just some of your loans. This can be a good strategy to help reduce your monthly payments and get out of debt faster.
Debt management program. If you’re unable to pay off your total debt, you could find yourself in some financial trouble. In this case, perhaps a debt management program is the right choice for you. With debt management, you’ll work with a professional credit counselors who will negotiate with your creditors to come up with an agreement that involves a repayment plan and possibly a reduction in your interest rates and fees.
Tax debt relief. Your assets and bank accounts could be at risk if you have a significant amount of tax debt on the books. If you still owe the government taxes, the IRS will step in and do what’s necessary to collect any money still owed to them, which is why it’s important to resolve any tax debt issues right away.
Tax debt relief involves having a tax professional suggest potential solutions to help you pay off your tax debt, depending on your income and type of tax debt you hold.
Look here for some more debt relief options.
Bankruptcy. While typically a last resort, bankruptcy can finally give you the relief you may be seeking from all the debt you owe and the penalties for all the late payments you’ve been making as a result of a compromised financial situation.
Bankruptcy can provide you with financial relief from your overwhelming debt by stopping any legal actions of creditors. This may be a suitable solution if you are absolutely unable to make good on your debt and need protection against creditors and collection agencies.
What is a bankruptcy score? Read this for the answer.
Final Thoughts
If you’re struggling with debt, there are plenty of options available to help you sort through your financial difficulties. Getting a loan to pay off credit card debt is one viable option for you to take advantage of if the numbers make sense. Otherwise, there are other options available that might be more suitable for your particular situation. Be sure to consult with experienced professionals who will be able to guide you in the right direction and help you finally settle your debt issues.