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Created By : Stacy B Miller
On 16th Nov,20
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How to use a personal loan to pay off debt and in other ways
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Student loans are meant for undergraduates whereas home loans are given to first-time or second- time home buyers. But what about personal loans?

Personal loans are unsecured loans that you can get from banks, lenders, personal finance companies, and financial institutions. You can use personal loans in various ways to uplift your financial situation. The most popular way to do it is to consolidate your high-interest loans with a personal loan. The interest rate on a personal loan is lower than credit cards. So, you can pay off your high-interest debts fast.

The personal loan approval process is quite fast. So, you can even get the money within 24 hours depending on the bank.

Today, we will discuss how to use a personal loan judiciously. Like I said before, you can use personal loans to pay off debt. First, let us discuss the reasons behind it. Thereafter, we will discuss the 7 other ways to use a personal loan for covering various expenditures.

Why should you use a personal loan to pay off credit card debt?

Many consumers prefer to pay off credit card debt with personal loans to ease their financial burden. Here are the top 5 reasons why it is good to use a personal loan to pay off credit card debt.

  1. Reduced interest rates

    The average interest rate on a 2-year personal loan is 9.50%. The average interest rate on credit cards is 14.52%. Now, you calculate the difference between the two types of credit. A personal loan can help you to save around 5% interest in total.

    Suppose you have 3 credit cards. Your total outstanding balance is $12,000. The average credit card interest rate is 17%. If you want to pay a mere 2.5% of the outstanding balance every month, then your minimum monthly payment will be $300. If you make only the minimum monthly payments, then it will take around 28 years to clear your debt. You have to pay $15,000 on interest itself.

    Now, if you take out a personal loan at 9.50% with a 2-year repayment term, then you have to pay $551 every month and only $1224 on interest. So, you will save $13774 on interest.

  2. Single monthly payments

    A personal loan helps to consolidate multiple bills into a single monthly payment plan at a moderate interest rate. This helps to simplify your financial life. When you have fewer bills, it becomes easy to tackle your budget and debts. You can make steady progress on your debt payments also.

  3. Fixed debt repayment period

    Personal loans come with a fixed repayment schedule and the final payment date. Your last payment date is the day when you will get out of debt. It is your financial independence day.

    When you have credit cards, you have the chance to add new debt every month. A credit card is a revolving account where you can make fresh new purchases and keep on adding debt. Therefore, it gets difficult to predict the final debt payoff date accurately.

    A personal loan is a closed-end loan. It has the final payoff date. So, it is easy for you to stay motivated and move toward your goal of attaining financial freedom.

    Sometimes, credit card interest rates are variable. When you have a fixed interest rate on a personal loan, you can have an idea of how to control debts. You can also know the date of your release from financial obligations.

  4. Better credit health

    Not many people know that the FICO score model doesn’t include personal loans in the calculation of the credit utilization ratio. When you pay off your debts with a personal loan, the ratio of your total revolving credit and your total available credit drops. This helps to lower your credit utilization ratio and increase your credit score. Moreover, personal loans help to improve your credit mix. This helps to impress the lenders as they feel that you can handle various types of debt responsibly.

  5. Reduced debt burden

    A single personal loan is enough to reduce your overall debt burden. Apart from credit cards, you can use the money to pay down your student loans or auto loans or any other loan you have. So, it isn’t that you have to use the money to pay down credit card debt only.

Just make sure you stick to the repayment plan of your personal loan. Otherwise, you can hurt your credit score. Also, you should avoid incurring fresh debts.

When you should not use a personal loan to pay off debts

There are times when you shouldn’t use personal loans to repay debts. So, let’s discuss and understand when personal loans are not a good option for paying off debts.

1. When the interest rates or monthly payments are high

There are 2 types of repayment plans for personal loans. The first one is the short-term personal loan, and the second one is the long-term personal loan. The short-term loan often has a low-interest rate. However, since the repayment period is short, your monthly payments tend to be high. You have to pay off the loan quickly. So, you have to make high installments. This may put pressure on your budget.

Again the monthly payments on a long-term loan are usually low. But the repayment term is again long. This means that you have to pay more in the long run.

2. When you can’t maintain a financially disciplined life

A personal loan gives you a lump sum amount in your hand. If you can’t be financially disciplined, then you could get into a worse situation. Let’s understand how.

Suppose you have taken out a consumer loan of $10,000. After you have received the money, you decide to use it to pay down your debts. So, you take steps as per your plan and clear your credit card debt.

You feel relieved and happy after paying down your credit card debt. You feel so relieved and happy that you start using credit cards for shopping again. So, you end up incurring fresh debts. So now, you not only have to pay off your personal loan but also the fresh credit card debt.

You are in a worse financial situation now. You have to manage both the debts now. You have to arrange money to make payments on both the debts. The utility of the personal loan is lost.

Personal loans have both pros and cons. Unless you lead a financially disciplined life, it will be tough to end your debt problems. Personal loans won’t solve your problems if you can’t change your reckless spending habits. Moreover, you need to have a good credit score to qualify for a personal loan at a good interest rate. If you don’t have a good credit score, then you can enroll in a debt consolidation program or a debt settlement plan to pay off your debts. In both these cases, you don’t need a good credit score to qualify for these programs. A dedicated Financial Coach will guide you through the entire process so that you don’t make any costly mistakes. Plus, you can save a lot of money with both settlement and consolidation. Call our toll free number 800-530-OVLG to know which option is best for you.

Other unusual ways to use a personal loan

As the name implies, a personal loan can be used for any purpose. Here are the 8 unusual ways to use a personal loan.

  1. Wedding : Have plans to get hitched this year? Congratulations! The average cost of a wedding comes to $30,000. Instead of using costly credit cards or wedding loans, use a personal loan to cover your expenses.
  2. Home renovation : You can use a personal loan to make your home energy-efficient. This will help you to revamp your home plus get some lucrative tax deductions in the long term.
  3. Car : Instead of taking out an auto loan, you can use a personal loan at a favorable interest rate to buy your first car. Talk with various lenders to get an affordable loan.
  4. Trip : Haven’t gone for a trip for a long time? Well, you can use a personal loan for having a wonderful vacation. Make sure you don’t depend on credit cards for sponsoring a vacation. This would increase your debt. Rather, follow tips to have a budget-friendly vacation.
  5. Medical bills : COVID-19 has made it clear that health is our most precious possession. Life is our foremost treasure. But life costs money especially when you are suffering from a deadly disease. Medical bills can shoot up to thousands of dollars. Unless you have adequate health insurance coverage, it is not possible to cover medical bills. And when you default on medical bills for more than six months, it is not unnatural to get sued.
    The best way to avoid legal hassles is to settle medical bills out of court as soon as possible to save money. If that option does not work out for you, then you can take out a personal loan and pay off your medical bills. It will help you to avoid legal expenses and a wage garnishment order.
  6. Shopping : No. I’m not telling you to buy clothes with a personal loan. What I’m saying is, you can buy furniture or an expensive appliance with a personal loan. Make sure you buy something that is useful. Don’t waste the money.
  7. Down-payment : There are lots of expenses associated with the home buying process. The home loan amount is not always enough. You have to arrange money for the down-payment. Then you have to arrange funds for the closing cost as well. A personal loan can help you a lot in this scenario. Remember, if you can’t make the down-payment on time, then you would end up delaying the mortgage process.
  8. Payday loans: Payday loans are quite expensive. The interest rates can shoot up to 500 percent in some cases. If you have multiple payday loans, then you can borrow a personal loan and pay them off. The average interest rate of a personal loan is negligible in comparison to payday loans. So, you can consolidate your payday loans with a personal loan and live stress-free.

Conclusion

Credit card debts can push you towards bankruptcy and tank your score. Plus, the incessant collection calls ruin your peace of mind. In this scenario, you can use a personal loan to pay off your high-interest credit card balances and pull up your credit score with time.

Last Updated on: Mon, 16 Nov 2020