Credit card debt can feel overwhelming.
It’s a common problem, though. The average American has $6,375 in credit card debt.
As the balance on your cards increases, it can get more and more difficult to keep up with your payments.
If all you can only make the minimum payments, it can take years to pay off your credit card balance.
You need to find a way out.
A personal loan can help you consolidate debt.
Read on for more information on personal loans, how they work, and how they can help you get out of credit card debt.
How a Personal Loan Works
Personal loans for debt provide you with a lump sum of money that you can use for whatever you need. Once you get the lump sum, you can send it to your creditors to pay off your balances.
You pay off the loan in installments over time. Many personal loans to consolidate bills have a five-year payment period, but it varies depending on the terms of the loan.
The first step to finding out your loan options is to get quotes from lenders. Some lenders will do a soft inquiry on your credit report. Inquiries can have a negative impact on your credit, but a soft inquiry won’t impact your score.
Once you know your options, you can review each loan carefully to find the loan that is best for you.
Types of Personal Loans
There are two main types of personal loans for debt consolidation: fixed rate and variable rate.
A fixed-rate loan has a set interest rate. The interest rate remains the same throughout the life of your loan. This means that your monthly payments will stay the same from month to month unless you are charged a fee.
Your loan may charge a late fee if your payment is received after the due date.
A variable-rate loan has an interest rate that changes from month to month. The interest rate on a variable loan is often based on the prime rate, which is the interest rate banks use to lend each other money.
Variable loan interest rates are often the prime rate plus a set percentage. For example, if your loan interest rate is the prime rate plus 2 percent, and the prime rate is 3 percent, then the interest rate on your loan for that period would be 5 percent.
Some lenders may also charge you an origination fee. This fee is usually 1 to 3 percent of the amount of the loan and is added into the loan itself. This is to cover the costs of starting the loan.
Should You Consolidate Debt?
Although a personal loan for debt consolidation may be helpful, you should evaluate whether it is the right fit for your situation.
For example, do you have a plan in place to pay off the debt? Having a consolidation loan can lower your overall monthly payments. If you start using your credit cards again, though, you can end up in a worse situation than you were in before you took out the consolidation loan.
One option to consider is closing your credit card accounts once you have paid them off. That can have a negative impact on your credit score, though. It still might be a worthwhile move if you anticipate having trouble resisting temptation.
If you decide to keep your accounts open, you can choose to keep your credit cards in an inaccessible location. Keep them in a safe or give them to a family member that you trust for safe-keeping.
Another consideration when it comes to personal loans to consolidate debt is the amount of your debt. If your credit card balance is low enough that you can pay it off in about one year, it may not make sense to take out a loan.
If you have a moderate amount of debt that you anticipate being able to pay off in five years os so, then a consolidation loan might make sense.
If your debt is high, or you’re uncertain how you will manage loan payments, you may want to consider other options. You may want to do credit counseling through a reputable agency, for example, in addition to taking out a consolidation loan.
A consolidation loan does not get rid of your debt. It moves your debt. That move can be helpful, though, if it puts you in a better financial situation.
How a Personal Loan Can Help
Personal loans for debt can often save you money.
One reason for the savings is that personal loans often have a lower interest rate than credit cards. Sub-prime credit cards can have interest rates of 25 percent or more. Personal loan interest rates vary, but you can often find them for less than 20 percent.
Even if your interest rate is only 1 or 2 percent less, this can save you hundreds or even thousands of dollars in the long run.
A personal loan also forces you to pay off your debt quickly. If you take out a personal loan for five years, you will have it paid off in five years.
If you’re paying the minimum on a credit card, you can end up paying on it for seven, eight, or even 10 years or more. The longer you pay on a credit card, the more you end up paying in fees and interest.
If you’re paying on several credit cards, just keeping up with all the monthly payments can be a challenge. A personal loan can simplify your financial life. You just have one payment to make each month.
Depending on your circumstances, a personal loan may have a lower monthly payment than what you were paying on your credit cards.
Let Us Help
If you’re overwhelmed by credit card or other debt, you’re not alone.
At Bonsai Finance, we have experience working with consumers just like you .
We can help you find a personal loan at a preferred rate that you can use to consolidate debt. Our lenders run a soft credit check, which doesn’t have a negative impact on your score.
All you need to do is fill out a simple form. From there you can review the terms of each offer and decide what’s right for you.