Personal loans for debt consolidation: what is the average amount?
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Recent research shows that personal loans are most often taken out for debt consolidation.
An April Bankrate study analyzing responses from over 160,000 applicants found that debt consolidation was 38% of the top reasons for obtaining a loan. An additional 5% of Bankrate Study applicants chose credit card consolidation as their primary motivation.
LendingTree, an online loan marketplace, reported that 35.7% of loan applicants were seeking to consolidate debt. 31.4% of applicants also wanted to refinance their cards. Credit is the most common reason to apply for a loan.
Both studies also found that debt consolidating loans were the most requested. They are much more than loans for other purposes like vacations, weddings, and home renovations domiciliary.
CNBC Select explains below the differences between credit card refinancing and debt consolidation, how they work, and how personal loans can save you money.
What is the difference between credit card refinancing and debt consolidation?
Personal loans can be obtained for two reasons: debt consolidation or APR refinance on high-interest debt.
Consolidating debt is when you have multiple credit card accounts and wish to consolidate your monthly payments into one bill. A personal loan can be taken out to pay off all your accounts. The lender will then repay you over several months until the loan is fully paid off.
It can be hard to keep track and manage multiple due dates and APRs for four credit cards. Consolidating debt can make it simpler to keep track of your payments if you find it difficult to keep track of them.
Refinancing your credit card is a good option if you have high-interest debt and wish to lower your APR. If you cannot pay your balance in the time you have, it is a good idea for you to refinance your credit card debt. Not move forward.
These are two different goals, but a personal loan can help both of them: simplify your payments and save interest. Whether from an online lender (or a bank), personal loans tend to have lower interest rates than a credit cards. However, it is important to understand the terms fully. Before you take out a loan, it is important to understand the terms.
Check out our top picks to get personal loans.
CNBC Select Best personal loans
How Loan Refinancing and Debt Consolidation Work
Although they are similar to using a personal loan to consolidate your debt or refinance your credit cards APR, they work slightly differently.
Personal loans are usually paid directly to your checking account. This allows you to use the money to pay your creditors. You then pay the loan company monthly in installments at a fixed rate. While personal lenders might charge a listing fee or initial fee, most do not charge any other fees than interest.
If you are eligible, credit cards with a balance transfer can be an option for personal loans. These cards allow you to pay your debt off with 0% interest for a period of time (between 6 and 21 months). Unless you are eligible for a balance transfer card, they usually charge a 2% to 5% fee.
You are asking for your credit card balance to be transferred electronically to the new balance transfer card. This should be paid off by the end of the introductory 0% interest period.
The Citi(r), Double Cash card or the US Bank Visa(r), Platinum card let you transfer debt from your existing credit card but will charge a minimum of 3% and $5 for each additional balance.
To qualify for credit cards that allow balance transfers, you must have excellent credit. However, there are many personal loans available to people with good or fair credit.
What is the average amount for a consolidation loan?
Both studies found that debt consolidation loans were the most sought-after type of loan among all categories.
Lending Tree reported that 2018 debt consolidation loans averaged $ 12,670, while credit card refinancing loans were even more expensive at $ 14,107.
Bankrate reported that the average personal loan amount was $ 2,000 to $ 25,000. However, 48% to $ 24,999 loans within this range and 52% to $ 25,000 loans were designated for debt consolidation.
How personal loans can help you save money
According to the latest Fed data, in February 2020, consumer credit card interest rates are currently at 16.6%. Personal loans have an average APR of 9.63% over the past 24 months.
Experian’s calculator calculates that $ 10,000 of credit card debt would result in $ 2,656.53 in interest. This is if you pay it off over three consecutive years. However, a personal loan at 9.63% would cost you $ 1,447.90.
You could save $ 1,208.63 in the above scenario. Although some experts are concerned about the rapid rise of personal loans, it is clear that you can save money by incorporating them into your debt repayment plans as long as you fully understand the terms.
Personal loans that are the best
CNBC Select has compared dozens of lenders when compiling its list of the top personal loans. We evaluated key factors such as interest rates, fees, loan amounts, and other features like how funds are distributed, automatic payments discounts, service clients, and how fast you can get funds.
No prepayment penalties, upfront fees, or charges are charged by any of the lenders listed on this page for processing your loan. Learn more about our process below.
CNBC Select reviewed dozens of personal loans from traditional and online banks in the United States. Flexible loan terms. Flexible terms and amounts that can be adapted to meet a variety of financing requirements.
We focused on these features when ranking the top personal loans:
- There are no registration or creation fees. We do not charge any upfront fees to borrowers for processing your loan.
- Fixed-rate APR: Variable rates are subject to change over the term of your loan. Fixed-rate APR locks you in an interest rate for the entire term of your loan. This makes it easier to budget.
- Flexible minimum and maximum loan amounts/conditions: Every lender has a range of financing options you can choose from based on your monthly budget and the length of time it takes to repay your loan.
- There are no early repayment penalties. Lenders on our list don’t charge borrowers prepayment fees.
- A simplified application process: We examined whether lenders offer same-day approvals and an easy online application process.
- Customer Service: Every loan on our database offers customer service via phone, email, or secure online messaging. We also prefer lenders that have an online advice or resource center to educate you on the personal loan process and your finances.
- Funds disbursement: The loans we offer can quickly be wire transferred to your checking account or sent in the form of a paper check. We have seen some lenders that offer direct payment options.
- Get automatic payments discounts: We’ve seen lenders reward customers who sign up for automatic payments by lowering their APR from 0.2% to 0.5%.
- The Loan amounts and payment limits of the above lenders offer loans in various sizes, from $ 500 up to $ 100,000. Each lender will advertise their loan amounts and payment limits. A pre-approval process can help you get an estimate of your monthly interest rate and payment.
After reviewing all the features, we made recommendations based on your overall financing needs, debt consolidation, refinancing, and next-day financing.
The advertised rates and fees for personal loans can fluctuate based on the Fed Rate. Once your loan agreement has been accepted, a fixed-rate APR will ensure that the interest rate and monthly payment remain the same throughout the loan’s term. Your credit score and creditworthiness will affect your APR, monthly payments, and loan amount.
Lenders will perform a credit check to determine if you are eligible for a loan. They may also ask for proof of income, identity, proof of address, and other documentation.
US Bank Visa(r), Platinum card information was collected independently by CNBC. The card issuer did not review it before being posted.
Editorial Note: All opinions, criticisms, or recommendations contained in this article are solely the responsibility of Select’s editorial staff and have not been approved, endorsed, or otherwise approved by any other party.