The Benefits of Using a Personal Loan to Reduce Debt

According to USA Today, the typical American carries around $6,354 in credit card debt. Unfortunately, this figure is significantly higher in states such as Alaska, New Mexico, and Louisiana, where the average debts are reported to be $10,685, $8,323, and $8,110, respectively, as of 2017, according to research by creditcards.com.

This predicament is troubling yet not entirely surprising. Many individuals rely heavily on credit cards during financial hardships, such as job loss or reduced income, while the burdensome interest rates exacerbate the issue. Currently, most credit cards have an APR surpassing 17%, making it challenging to reduce the principal balance. Consequently, many borrowers remain in debt for extended periods, often accumulating even more debt.

Many consumers adopt various strategies to alleviate their debt, one being the use of balance transfer cards. These cards typically offer a promotional 0% APR for a limited duration of 12 to 21 months. However, there is usually a balance transfer fee of 3% to 5% of the amount transferred, and the promotional period ultimately expires.

While some individuals successfully utilize balance transfer cards to manage their debt at 0% interest, others may only pay the minimum amount due, failing to gain significant traction against their debts. Once the introductory rate concludes, these consumers often find themselves back where they began—with substantial debt and a high APR.

Alternatively, there’s a more reliable and straightforward method to address debt, which involves taking out a personal loan. (See also: 5 Situations Where Personal Loans Might Be More Beneficial than Credit Cards)

Leveraging a Personal Loan to Eliminate Debt

Although applying for a personal loan to resolve debt might seem counterintuitive, there are compelling reasons for its effectiveness. For one, personal loans often come with lower fixed interest rates—sometimes as low as 4.9% APR for borrowers with good credit. Additionally, these loans feature established repayment schedules that clearly outline when the debt will be settled.

With personal loans, borrowers can expect fixed monthly payments that don’t fluctuate—the opposite of credit cards, where payments can vary based on outstanding balances and interest rates.

When opting for a personal loan, you gain clarity on your financial obligations. You will understand how much to allocate monthly, the timeline for loan repayment, and the interest rate that will remain constant throughout the loan period. Moreover, personal loans are not lines of credit, so once you’ve used the funds to settle your credit card debts, you won’t have the possibility of accumulating more debt. (See also: 10 Essential Facts to Know Before Securing a Personal Loan)

Implementing the Right Approach

If your aim this year is to eliminate debt, a personal loan might be precisely what you need. However, you can enhance your chances of success by adhering to a few key practices during the repayment process.

Research Personal Loan Options

Multiple financial institutions, including banks, credit unions, and several online lenders, provide personal loans. Start by comparing offers based on interest rates and associated fees.

The most favorable personal loans are those that come with no origination or hidden fees. To facilitate comparisons among various lenders efficiently, consider using platforms like LendingTree, which allows you to fill out one application and receive multiple offers from different financial institutions. (See also: 5 Personal Loan Charges To Avoid)

Utilize this comparison tool to find the best options tailored to your needs by selecting the loan type, amount, credit rating, and location.

Develop a Budget

Once you’ve identified potential personal loans, it’s crucial to set up a monthly budget to manage your new payment obligation effectively.

Review your bank statements to evaluate your earnings versus your expenses, including your new loan, housing, and other bills. Look for areas to cut back, whether it’s reducing dining out, pausing a subscription service, or imposing a spending freeze. Ensure you clearly understand how much you can allocate monthly while meeting all your financial responsibilities.

Avoiding Credit Card Usage

Lastly, it’s paramount to refrain from using credit cards! This step is vital in your journey to financial recovery.

Consolidating credit card debt through a personal loan might tempt you to revert to credit usage. However, doing so could result in further insurmountable debt.

Instead, consider securing your credit cards and relying on cash or debit for purchases. To effectively eliminate debt and maintain that status, it’s essential to learn how to live within your financial means. Stepping away from credit card usage is a fundamental strategy to ensure a sustainable lifestyle that you can afford.