Unlock Financial Freedom: The Benefits of Using a Personal Loan to Reduce Debt
Your Money Working Harder
The average American with credit card debt carries a balance of approximately $6,354, according to USA Today. Unfortunately, some states like Alaska, New Mexico, and Louisiana report even higher averages, with consumers in these areas carrying debts of $10,685, $8,323, and $8,110, respectively, as of 2017.
This situation is not entirely surprising. Many individuals resort to credit cards during financial hardships, such as job loss or reduced income. The average credit card today has an APR exceeding 17%, making it challenging to chip away at the principal balance. Consequently, many find themselves trapped in a cycle of debt that seems never-ending.
To combat this, consumers often turn to balance transfer cards, which offer 0% APR for a limited period—typically between 12 to 21 months. However, these cards usually come with a balance transfer fee of 3% to 5%, and the introductory rate is temporary.
While some successfully use balance transfer cards to reduce their debt, others merely make minimum payments, failing to make significant progress. Once the introductory period ends, they often find themselves back where they started, burdened by high-interest debt.
A potentially more effective solution is a personal loan. (See also: 5 Times Personal Loans May Be Better than Credit Cards)
How a personal loan can help you climb out of debt
Applying for a personal loan to address existing debt may seem counterintuitive, but there are compelling reasons to consider this option. Personal loans often come with lower fixed interest rates—sometimes as low as 4.9% APR for those with good credit. Additionally, they feature fixed repayment schedules that clearly outline when you will be debt-free.
Unlike credit cards, which can fluctuate in payment amounts based on your balance and APR, personal loans provide a consistent monthly payment. This predictability allows you to plan your finances more effectively.
With a personal loan, you gain clarity on your financial obligations. You know your monthly payment, the total duration of the loan, and the interest rate throughout the term. Importantly, a personal loan is not a revolving line of credit, meaning once you use it to pay off your credit cards, you won’t have the option to accrue more debt. (See also: 10 Things You Need to Know Before Taking Out a Personal Loan)
How to do it the right way
If your aim is to eliminate debt this year, a personal loan could be your best ally. However, effective repayment strategies are crucial.
Compare personal loan offers
Personal loans are available from various sources, including banks, credit unions, and online lenders. Start by comparing offers based on interest rates and fees. The best loans typically have no origination or hidden fees. For a streamlined process, consider using LendingTree, which allows you to fill out a single application to receive multiple offers.
Utilize this handy comparison tool to find the best loan options tailored to your credit rating and financial needs.
Create a spending plan
Once you secure a personal loan, establish a monthly budget to manage your new payment effectively. Review your bank statements to assess your income and expenses, including your new loan, housing costs, and other bills. Identify areas where you can cut back, whether that means dining out less or temporarily eliminating non-essential expenses.
Stop using credit cards
Lastly, it’s vital to stop using credit cards altogether. This step is crucial for maintaining your financial health.
Using a personal loan to pay off credit card debt can lead to the temptation of accruing new debt if you continue using your cards. To avoid this pitfall, store your credit cards safely away and rely on cash or debit for your purchases. Living within your means is essential for achieving and maintaining a debt-free lifestyle.
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Your Money Working Harder
The average American with credit card debt carries a balance of approximately $6,354, according to USA Today. Unfortunately, some states like Alaska, New Mexico, and Louisiana report even higher averages, with consumers in these areas carrying debts of $10,685, $8,323, and $8,110, respectively, as of 2017.
This situation is not entirely surprising. Many individuals resort to credit cards during financial hardships, such as job loss or reduced income. The average credit card today has an APR exceeding 17%, making it challenging to chip away at the principal balance. Consequently, many find themselves trapped in a cycle of debt that seems never-ending.
To combat this, consumers often turn to balance transfer cards, which offer 0% APR for a limited period—typically between 12 to 21 months. However, these cards usually come with a balance transfer fee of 3% to 5%, and the introductory rate is temporary.
While some successfully use balance transfer cards to reduce their debt, others merely make minimum payments, failing to make significant progress. Once the introductory period ends, they often find themselves back where they started, burdened by high-interest debt.
A potentially more effective solution is a personal loan. (See also: 5 Times Personal Loans May Be Better than Credit Cards)
How a personal loan can help you climb out of debt
Applying for a personal loan to address existing debt may seem counterintuitive, but there are compelling reasons to consider this option. Personal loans often come with lower fixed interest rates—sometimes as low as 4.9% APR for those with good credit. Additionally, they feature fixed repayment schedules that clearly outline when you will be debt-free.
Unlike credit cards, which can fluctuate in payment amounts based on your balance and APR, personal loans provide a consistent monthly payment. This predictability allows you to plan your finances more effectively.
With a personal loan, you gain clarity on your financial obligations. You know your monthly payment, the total duration of the loan, and the interest rate throughout the term. Importantly, a personal loan is not a revolving line of credit, meaning once you use it to pay off your credit cards, you won’t have the option to accrue more debt. (See also: 10 Things You Need to Know Before Taking Out a Personal Loan)
How to do it the right way
If your aim is to eliminate debt this year, a personal loan could be your best ally. However, effective repayment strategies are crucial.
Compare personal loan offers
Personal loans are available from various sources, including banks, credit unions, and online lenders. Start by comparing offers based on interest rates and fees. The best loans typically have no origination or hidden fees. For a streamlined process, consider using LendingTree, which allows you to fill out a single application to receive multiple offers.
Utilize this handy comparison tool to find the best loan options tailored to your credit rating and financial needs.
Create a spending plan
Once you secure a personal loan, establish a monthly budget to manage your new payment effectively. Review your bank statements to assess your income and expenses, including your new loan, housing costs, and other bills. Identify areas where you can cut back, whether that means dining out less or temporarily eliminating non-essential expenses.
Stop using credit cards
Lastly, it’s vital to stop using credit cards altogether. This step is crucial for maintaining your financial health.
Using a personal loan to pay off credit card debt can lead to the temptation of accruing new debt if you continue using your cards. To avoid this pitfall, store your credit cards safely away and rely on cash or debit for your purchases. Living within your means is essential for achieving and maintaining a debt-free lifestyle.
Like this article? Pin it!
