- Debt consolidation can save you money by moving your debt to a lower interest rate.
- Simplifying your payments lower the odds that you miss a monthly payment, which can stay on your credit history for seven years.
- Consider debt-consolidating alternatives such as a balance transfer credit card before taking out a personal loan.
Personal loans are a popular way for people to borrow money for a wide range of reasons. While you shouldn’t take on extra debt without a very good reason, in some cases a new personal loan can help you get out of debt.
Consolidating credit cards or other high-interest debts with a single, lower-interest personal loan can help you save money in a couple of ways. Between lower interest rates and a faster payback period, you could wind up saving a bundle.
A personal loan could be the right fit for you if one or more of the following situations applies:
1. You can get a lower interest rate
The single biggest rule to follow when consolidating or refinancing any debt, even student loans, is this: only consolidate if you can move your balance to a lower interest rate. Moving to a higher interest rate will cost you more in the long-term.
You can think of an interest rate as a cost per dollar borrowed per year. If you have $1 on a credit card at 20% APR, you will pay 20 cents per year for every dollar on that card. Going to a loan above 20% means you’ll pay more. Below 20%, you’ll pay less. This is the case no matter the balance.
Most personal loan interest rates are based on a combination of market interest rates and your personal credit history. If you have great credit, you can leverage it to pay off your debts at the lowest possible cost.
Note: If one particular credit card has a high interest rate, you can also look into getting a balance transfer credit card, which may allow you to move debt from a credit card with a high APR to one with a zero or lower APR.
2. You want to make fewer monthly payments
The more credit card payments you have to make each month, the more likely you are to forget a payment. A late or missed payment can drag down your credit score for up to seven years, so you should always make every effort to pay at least the minimum payment by the due date each month.
When you consolidate your debts, you can condense those multiple payments into one. Depending on the debts you consolidate and your APRs, your new monthly payment will hopefully be lower than all your old monthly payments combined.
Note: Most credit card companies will let you set automatic payments for the minimum amount due each month. Though you’ll still have to juggle several credit card balances, you won’t be in danger of missing any payments.
3. You want to create a debt freedom deadline
If you have credit card debt, getting to a zero balance isn’t always as clear as it is with other debts. Credit cards, for example, allow you to keep adding to your balance. If you spend more than you can pay off in full each month, you’re going to find yourself buried in a deepening pit.
On the other hand, installment loans come with a fixed number of payments and lead to a zero balance with the final payment. Popular personal lenders offer fixed and flexible terms.
If you can convert credit card debt into an installment loan balance, you’ll know exactly when your balance will be paid off. By paying off credit card debt and putting the debts into three- or five-year installment loans, debt freedom could be just over the horizon.
Alternatives to personal loan debt consolidation
Perhaps you were looking for a credit card when you still had a limited credit history, so you settled for a card with a high APR. A few years later, you’ve been paying your bills on time and have built a solid credit history. You might be less satisfied with your APR. With the credit you have built, you may be able to secure a personal loan with a lower interest rate than what you’re currently paying. However, before you go shopping for that loan, it’s worth your time to consider some alternatives.
Call your credit card company: One painfully obvious but often underutilized strategy for lowering a credit card’s APR is to simply ask for one from your credit card company. Though there’s no guarantee that they’ll say yes, it doesn’t hurt to ask especially if you’ve been diligent about payments.
In the same vein, you can also see if your credit card company will upgrade your credit card, which may come with a lower APR and a handful of other perks.
Consider a balance transfer: As mentioned earlier, one strategy for getting a lower APR is to move debt onto a balance transfer credit card. These credit cards usually come with an introductory 0% APR period that can last anywhere from 12-18 months depending on the card. That gives you some time to pay off your debts without worrying about your payments outpacing interest. However, you should be mindful that you’ll only be able to transfer debt up to that card’s credit limit.
Debt repayment strategies: Taking out a loan to consolidate debt can be impractical, but if you decide against it, you’re still left with several debts that you’re struggling to pay off. This is where debt repayment strategies come in namely the avalanche and snowball methods.
In the avalanche method, you make all the necessary minimum payments on your credit card. You then funnel the remaining money you’re allotting to debt repayment to the credit card bill with the highest APR. With this strategy, you end up paying the least amount of interest.
The snowball method is similar, except you take your remaining money and target the lowest balance first. Every debt that you completely pay off frees the money from the minimum payment you would’ve had to pay. That money is added to this snowball as you tackle the next lowest debt.
Smart credit decisions eliminate your debt
When you pay interest on a credit card, you don’t get anything in return. Unlike mortgage debt, which gives you a home, credit card debt is likely due to a smorgasbord of past purchases. When that debt accumulates interest, you end up paying more for whatever you bought using your credit card. Getting into good spending and budgeting habits can help you avoid debt in the future while paying off any debt you have today.
Between credit cards, student loans, auto loans, mortgage or rent, and other monthly bills, managing your money may feel like more of a juggling act than anything else. Making smart money decisions with a long-term focus is the best path to financial success. If consolidating can save you money while helping you achieve your long-term goals, don’t hesitate to turn in that application today.
Paul Kim is a former Personal Finance fellow at Insider. He wrote explainers and how-tos that helped readers understand how to better manage their money. An NYU graduate, he spent the majority of his journalism career at his student-run newspaper Washington Square News, where he wore numerous hats. Most recently, he helped rebuild the newspaper in the spring of 2021 as its managing editor after nearly all the staff resigned the previous semester over issues of editorial independence.When he’s not writing, Paul loves cooking and eating. He hates cilantro.
Direct tips on family recipes to @PaulKimWrites on Twitter.
Eric Rosenberg is a finance, travel, and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full-time. He has in-depth experience writing about banking, credit cards, investing, and other financial topics, and is an avid travel hacker.
When away from the keyboard, Eric enjoys exploring the world, flying small airplanes, discovering new craft beers, and spending time with his wife and little girls.
You can connect with him at Personal Profitability