Should I use a personal loan to consolidate debt? Savings Coin presented by Coosa Valley Credit Union
Many consumers use personal loans to consolidate higher interest rate debt, such as credit card debt. Compared to other types of loans and credit, a personal loan has several advantages. So what are the benefits of a personal loan, and is it the best option for you?
Personal loans generally have lower interest rates
For people with a good credit rating, a personal loan usually has a lower interest rate than a credit card. While the rates will vary depending on your credit history and the current market, it’s not uncommon for people to get a much better deal on a personal loan than on a credit card.
You can use one to consolidate your debts
A big advantage of personal loans is that you can use them to consolidate existing debts, depending on the amount of your debts. If you have three credit cards that each have a balance of $ 1,500, taking out a personal loan allows you to pay off all three cards. Instead of making three separate payments each month and worrying about three separate interest rates, you can make a single monthly payment, with just one interest rate. Depending on the length of the personal loan, you may be able to pay less each month, as well as save money over the life of the loan by taking advantage of the lower interest rate and fixed term.
You can use the money however you want
When you get a mortgage loan, you have to use the money from that loan to buy a house. When you get an auto loan, you use the money to buy a car. Your house or car serves as collateral for the loan, and you can only use the money for those two purchases.
A personal loan, on the other hand, is an unsecured loan. You are not limited to using the money for one purpose. If you want to use the loan to renovate your home, you can. You can also use it to pay off other debts, fund vacations, or buy other consumer goods.
They can help you improve your credit score
If you are looking for a way to improve your credit score, a personal loan could help. Personal loans are installment loans, which means that you pay off a fixed amount over a period of typically two to five years. Credit cards are a type of revolving credit, which means that once you’ve paid off your balance, you’re free to borrow money again.
According to MyFico, your credit combination represents 10% of your overall credit score. If all you have is revolving credit, you might have a lower score than someone with a mix of installment loans and revolving credit. While you don’t necessarily want to take out a loan for the sole purpose of improving your credit score, if you don’t have a lot of credit history and only have credit cards, a personal loan can. help you increase your score. .
A big caveat
Before you rush to your credit union to apply for a personal loan, it’s important to get the big picture. For example, getting a personal loan is not a sure-fire way to get out of debt. When you use a personal loan to pay off other debt, you are simply replacing one debt with another. You’ll also want to create a budget and look for ways to change your spending habits if you want to stay debt free.
The other things to remember is that the rate you see advertised may not be the rate you are offered. Several factors, including your credit score, affect the actual interest rate you receive on a personal loan. In some cases, the interest rate may be higher than what you are currently paying. Make sure to check the fine print.
Once you’ve weighed the pros and cons of a personal loan, the next step is to apply and see if you qualify for a loan. Visit your nearest Coosa Valley Credit Union branch and speak to a loan officer today!