How to Consolidate & Pay Off Credit Card Debt With Personal Loans

personal-loans-credit-card-refinancing

Imagine making a sizable dent in your credit card debt. You can finally become debt-free and not have to worry about interest charges keeping you from hitting your financial goals.

Using personal loans, you can refinance your credit cards at a lower interest rate. Also, you'll simplify your debt repayment because you can consolidate your credit card debt down to a single payment.

Find out whether personal loans can help you achieve the goal of becoming credit card debt-free:

How To Use Personal Loans for Credit Card Refinancing

Taking out a personal loan to pay off your credit cards makes sense only if the interest rate on the personal is lower than the APR on your credit cards. This way, you're saving money by paying less interest on your debt.

The Consolidation Method

The strategy is to use the funds from the personal loan to pay off your high-interest credit card debt before it can get further out of control -- and then, pay off your personal loan with its lower interest rate. You’re using one line of credit to pay off another.

Here’s an example: Say you have multiple credit cards with APRs of 22%, 18%, and 13%.

You can take out a personal loan at 8% APR to pay off all those credit card balances.

You'll end up with a lower total monthly payment and pay less in total interest. Better yet, you'll be debt-free faster (assuming you don't keep adding to the balances).

Which Lenders to Consider

Personal loans are quite common as you're likely to find them at banks, credit unions, and other local lenders.

Online lenders are also abundant and convenient, since the application, approval, and payment processes are all through the convenience of your computer or phone.

With the rise of the online lending marketplace, you have plenty of personal lenders to choose from. Here are a few:

Check the Personal Loans Fees

Personal loans may stand up well to credit card debt as a great refinancing tool, but look first before you proceed.

Read your loan contracts carefully and watch out for fees, charges and other terms that could cost you money before you save it.

Some lenders may charge loan origination fees or impose additional interest, but borrowers may not realize it until after they’ve signed their loan contract. (Origination fees can range from about 1 to 6% of your total loan balance.)

Is your goal to pay off your loan early? Make sure there are no prepayment penalties in store.

Also known as “exit fees,” lenders charge them as an additional cash grab when they’re not earning interest from borrowers who pay off their balance earlier than scheduled. Your loan contract should expressly stipulate “no prepayment penalties” in the language.

Personal Loans Fees

Lender Name Origination Fees
Santander Bank None
Upstart 2.8% - 8.0%
Lending Club 1.0% - 6.0%
Discover Bank None
Avant 1.50% - 4.75%
Citibank None
SoFi None
Wells Fargo None
USAA None
TD Bank None
Marcus None
Citizens Bank None
M&T Bank None
Prosper 1.0% - 5.0%
American Express None
One Main Financial Varies by state
RocketLoans 1.0% - 6.0%
PNC Bank None
Best Egg 0.99% - 5.99%
Earnest None

What You Need to Know About Personal Loans

Most commonly, personal loans are used to finance big purchases, major home repairs, college tuitions, upcoming weddings etc. A personal loan fits the bill in those instances when you need an immediate, large cash reserve.

Difference Between Secured and Unsecured Loans

Personal loans can be secured or unsecured. In the former, they’re backed by collateral, an item of value you’d pledge to your lender.

For example, with an auto loan, your collateral is the car that you bought with the loan. With a mortgage loan, it’s your home.

If the borrower defaults on the loan, the lender reserves the right to keep the collateral and resell it to another borrower to make up for the financial loss.

An unsecured loan calls for no collateral. Therefore, your chances of approval rely mostly on the strength of your credit score, household income, and monthly expenses. These factors also affect the interest rate of your personal loan.

Pros and Cons of Unsecured Loans vs. Secured Loans

Unsecured Loans Secured Loans
Pros
  • Great option if you are trying to consolidate existing debts
  • Does not require any kind of collateral so there is less risk for you
  • Usually only takes at most a few days to receive funds
Pros
  • Easier to qualify for if you have lower credit and/or lower income
  • Often lower interest rate than unsecured loans
  • Typically can borrow a larger amount
Cons
  • Interest rates can be higher than secured loans
  • Harder to qualify for
  • Lower lending limits
Cons
  • You put your own assets on the line so you're at risk to lose more
  • Application process may take longer which could lead to more fees and longer waiting period
  • If you use savings as collateral, that money becomes unavailable for the duration of the loan

Impact of Your Income & Credit Score

Your credit score is an essential factor in determining your personal loan eligibility, but so is your debt-to-income ratio, or the current income in relation to the amount of debt you hold.

While the dollar amount of your gross salary or take-home pay is something a lender will consider (since it’ll indicate if you’re borrowing more than you can afford), it isn’t as important to lenders than seeing that your monthly debt payments are no higher than 43 percent of your total earnings.

A good credit score in the 700+ range improves your chances of getting approved for a loan at a low interest rate, but a poor credit score may see your application rejected, or get you saddled with a double-digit APR.

Your interest rate is one of the most important parts of refinancing credit card debt with a personal loan.

Similar to consolidation, where you’d combine several forms of debt into one new loan, refinancing involves taking out a personal loan with a lower interest rate than that of the card you’re in debt with.

Credit Score Ranges and Quality

Credit Score Ranges Credit Quality Effect on Ability to Obtain Loans
300-559 Very Bad Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.
560-649 Bad May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.
650-699 Average/Fair Eligible for many traditional loans, but the interest rates and terms may not be the best.
700-749 Good Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.
750-850 Excellent Qualify easily for most loans and lines of credit with low interest rates and favorable terms.

Loan Limits

Personal loans may range anywhere from $1,000 to $100,000, and come with fixed interest rates and repayment terms.

So while your credit score may determine the APR you’re offered on an unsecured loan, the rate you get won’t change for the life of the loan, usually ranging anywhere from 12 months up to about five years.

Personal Loans Borrowing Ranges & Terms by Lender

Lender Name Ranges of Borrowing Amounts Available Terms
Santander Bank $5,000 - $35,000 2 - 5 years
Upstart $1,000 - $50,000 3 - 5 years
Lending Club $0 - $40,000 3 - 5 years
Discover Bank $2,500 - $35,000 3 - 7 years
Avant $2,000 - $35,000 2 - 5 years
Citibank $1,000 - $50,000 3 - 5 years
SoFi $5,000 - $100,000 3 - 7 years
Wells Fargo $3,000 - $100,000 1 - 5 years
USAA $2,500 - $100,000 2 - 7 years
TD Bank $2,000 - $50,000 1 - 5 years
Marcus $3,500 - $30,000 3 - 6 years
Citizens Bank $5,000 - $50,000 3 - 7 years
M&T Bank $2,000 - $25,000 1 - 5 years
Prosper $2,000 - $35,000 3 - 5 years
American Express $3,500 - $25,000 1 - 3 years
One Main Financial $1,500 - $25,000 2 - 5 years
RocketLoans $2,000 - $35,000 3 - 5 years
PNC Bank $1,000 - $25,000 6 mo - 5 years
Best Egg $2,000 - $50,000 3 - 5 years
Earnest $2,000 - $50,000 1 - 3 years

Personal Loan Calculator

Time, Application Process Can Determine Funds Availability

How soon your personal loan funds become available depend on the timing of your application process. Some online lenders say that borrowers can receive their personal loan funds in as little as 24 hours. For others, it may take as long as a month.

Loan Limits and Payment Time Frame for Top Lenders

Lender Name Borrowing Amounts Payment Time Frame
Upstart $1,000 - $50,000 Receive funds next business day
TD Bank $2,000 - $50,000 Receive funds in up to two business days
Discover $2,500 - $35,000 Receive funds next business day
Citizens Bank $5,000 - $50,000 Receive funds in up to two business days
American Express $3,500 - $25,000 Receive funds between two to five business days

Fake Lenders Exist

Scams abound in the personal loan world, too, so watch out. What might seem like a legitimate lender may actually be a thief waiting to bilk you or your money -- sending you further down the debt spiral.

If a prospective lender looks or sounds unfamiliar, look them up online.

Do they have a web presence? What about a legitimate phone number, address, website, business license?

Check with your local Better Business Bureau or the Federal Trade Commission to see if they’re legit. If you have poor credit and the personal loan interest rate they’re offering you seems too good to be true, it probably is.

Fees You Need to Know From Top Five Lenders

Lender Name Prepayment Fees Origination Fees Late Fees
LendingClub None 1.0% - 6.0% 5% of the unpaid
amount or $15,
whichever is greater
Citibank None None Varies among borrower
Avant None 1.50% - 4.75% $25 if not paid
in full within 10 days
Marcus None None None but late payments
lead to higher
interest accrual
Upstart None 2.8% - 8.0% 5% of the unpaid
amount or $15,
whichever is greater

How to Get Approved for a Personal Loan

The more information you provide a lender in your application, the faster your chances of getting approved. Online or in person, there’s not a lot of paperwork to fill out, but come prepared with some of these documents to submit when you apply for a personal loan:

  • Personal identification: a driver’s license, birth certificate, current passport, or Social Security card. These documents should include your date of birth, and in some cases, your mother’s maiden name.
  • Proof of your current street address: a utility bill, rent or mortgage statement, etc. You may also be asked to provide your previous addresses, plus your employer’s address and contact information.
  • Proof of your current and past income: pay stubs, tax forms or bank statements (easily retrieved if you’re pursuing a loan through your financial provider).
  • Recent debt accounts: Credit cards, auto or mortgage loans, student loans or other lines of credit.

How to Increase Your Chances of Approval

There’s no secret to bettering your chances of getting approved for any loan, not just a personal loan. It’s simply a matter of keeping your finances and financial habits in check:

Aim for a high credit score

If you’re in debt, doing the things that keep you out of further debt can improve your credit score in the long run.

Pay your bills on time, in full, and use no more than 30% of the credit available to you.

Apply for loans sparingly, and keep a good mix of credit and loan accounts. All of these behaviors reflect positively on your credit report and score, and lets future lenders know that you’re serious about being financially responsible.

Avoid using the credit card you’re in debt with

Continuing to use the card can exacerbate your debt and result in you borrowing even more money through a personal loan. More money borrowed means a bigger challenge to repay it, no matter how low your interest is.

That doesn’t mean you can never use the card again, but refrain from future purchases until you’ve been approved for a loan and gotten your card balance under control. Payments made to the loan don’t make more credit available to you on your card.

Create a better budget

Figuring out ways to free up some cash towards your credit card balance gives you a head start on your debt, and ultimately, less money you need to borrow with a personal loan.

Consider some alternatives to personal loans, too, like importing your debt to a low-interest balance transfer card.

Final Thoughts

A personal loan can become a very personal solution to such an intensely personal and troubling problem like credit card debt.

If you’re been dreaming of being without debt for some time, think of personal lending as a form of “good” debt that gives you the advantage of low interest rates and more reasonable repayment terms, for a debt-free, and financially free, future.

Compare personal loans to find the right one for you.

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