Personal loans offer a flexible way to consolidate all types of debt. (iStock)
Consumer debt reached a record high in 2019, according to data by Experian, one of the three national credit bureaus. And while the average consumer’s debt as a percentage of their income has decreased since the financial crisis, balances have grown, in some cases significantly.
The average credit card balance, for instance, sits at $6,194. Personal loans are among the most versatile forms of credit and are often used as a way to consolidate one or more different types of debt.
Here’s why you should consider using one to help pay down your debt.
Average American debt by loan type
Among those Americans who have various forms of credit, here’s the average balance for each, according to Experian:
- Mortgage loan: $203,296
- HELOC: $45,191
- Student loan: $35,620
- Personal loan: $16,259
- Auto loan: $19,231
- Credit card: $6,194
- Retail card: $1,155
It should come as no surprise that a mortgage loan is among the priciest of the seven. After all, taking out a mortgage is a major financial decision that shouldn't be taken lightly.
4 CHEAPEST WAYS TO PAY OFF CREDIT CARD DEBT
3 easy ways to pay off debt
Don't let debt consume your life. Now is the time to get back on track and pay off your debt— and there are some easy and fast ways to do it. Here are three optionsyou should consider to reduce your debt now and improve your personal finances.
- Refinance loans
- Debt consolidation loans
- Balance transfer credit cards
- Home equity loans or HELOC
1. Refinance loans
Fortunately, there are ways to help cut the life of your mortgage loan and reduce your monthly payments— particularly, when interest rates are low. Mortgage refinance applications are booming right now, with homeowners hoping to get a better deal on their current home loans.
Based on the current mortgagerates, itmay be a good time for you to refinance, too.To seehow much you could save,crunch the numbers, andcompare rates and mortgage lenders using Credible's free online tools.
Similarly, it's a good time to refinance student loans.
Multi-lender marketplace Credible canhelp youcompare private lenders at once to determine if now is the right time to refinance, based on your loan type, loan amount, and more.
WHAT ARE STUDENT LOAN REFINANCING RATES?
It generally only makes sense to use a personal loan to consolidate high-interest debt, and credit card debt tends to be the main target for debt consolidation with a personal loan.
2. Debt consolidation loans
Personal loan options are available across all credit scores, but it can be challenging to find eligibility requirements with many lenders. Fortunately, several online personal loan companies allow you to get prequalified before you apply, so you’ll have a good idea of your approval odds.
This process doesn’t hurt your credit score and will allow you to shop around and compare multiple options. You can use an online marketplace like Credible to go through the process with several lenders at once.
9 OF THE BEST DEBT CONSOLIDATION COMPANIES
Keep in mind that while it’s possible to get a personal loan at all credit levels if you have fair or poor credit, you may not be able to get favorable terms.
Pros
If you’re looking for ways to eliminate your high-interest debt, here are some of the potential benefits you can enjoy when you use a personal loan to consolidate:
- You may qualify for a lower interest rate.
- Personal loans have set repayment terms, giving credit card users more structure to their debt repayment plan.
- Replacing multiple debts and their monthly payments with one loan and one monthly payment can simplify your repayment plan.
- Paying off credit cards reduces your credit utilization rate, which can boost your credit score.
Cons
That said, there are some potential downsides to using a debt consolidation loan:
- There’s no guarantee you’ll be able to get a lower interest rate than you have now.
- The monthly payment on a personal loan may not be affordable for some.
- Some personal loans charge upfront origination fees.
- It doesn’t prevent you from adding more debt to your credit cards.
With debt consolidation, it’s best to borrow only what you need, which is the amount you’d like to consolidate. Note, however, that some lenders charge an upfront origination fee — which can be as high as 8%— which is then deductedfrom your loan disbursem*nt.
As a result, you may not get enough to pay off your debt unless you account for that fee. If the charge is 5% of the loan amount, for instance, divide the amount you need by 0.95 to ensure you get the full amount needed. Also, it’s important to keep in mind that not all lenders may offer you the amount you need, so make sure you compare multiple options via Credible before you make a decision.
3. Balance transfer credit cards
A balance transfer credit card is another simple option for those who are behind on payments.
These cards offer an intro 0% APR promotion for balances transferred from another card. If you have good credit or better, this can be a great way to save money while you pay down debt. Some cards charge a transfer fee of up to 5%, though.
If this is something you're considering,head to Credible today to view some of their bestbalance transfer credit card options, as well astheir intro APR offers, any transfer fees, and terms.
HOW TO GET A BALANCE TRANSFER CARD
4. Home equity loans or HELOC
For larger balances, it may make more sense to borrow from your home’s equity. These loans typically offer rock-bottom rates but do charge high closing costs.
Like many personal loans,HELOCs are primarily used for home remodels, improvements, or to cover an emergency expense.Use Credible to compare personal loan rates from top lendersand see which makes sense for you.
HOW TO USE A HOME EQUITY LOAN FOR DEBT CONSOLIDATION
If your credit isn’t in great shape, debt consolidation with a personal loan may not be affordable. In this scenario, consider working with a credit counselor to get on a debt management plan. Credit counseling agencies can negotiate lower interest rates and monthly payments with your creditors and make your payments more affordable.
As you consider all of your options, make sure to visit Credible and use their personal loan calculator and browse their best personal loan offerings to get an idea of what that option would cost compared to others.
