How Loans Can Help You Get out of Debt Faster

How Can More Debt be a Good Thing?

Did you know that the average American has over $90,000 in debt? That’s a staggering number, and it’s no surprise that many people feel overwhelmed by their financial burdens. While it may seem impossible to get out of debt, there are solutions available, and one of them is getting a loan.

While it may seem counterintuitive to take on more debt to get out of debt, loans can actually be a powerful tool for achieving financial freedom faster. Although many people associate loans with adding to their financial burdens, when used correctly loans can help you consolidate your high interest debts and take advantage of lower interest rates to reduce your debt burden.

The 3 Types of Loans

There are several types of loans available, each with its own set of terms and conditions. The most common types of loans are personal loans, student loans, and home equity loans.

  • Personal Loans:

    Personal loans are unsecured loans that you can use for a variety of purposes, such as consolidating debt, making a large purchase, or covering unexpected expenses. These loans typically have fixed interest rates and repayment terms, and the amount you can borrow depends on your credit score, income, and other factors. According to Bankrate, the average interest rate on a 24-month personal loan in the United States is 10.28%, while the average credit card interest rate is over 16% – making personal loans a less expensive debt that can save people money in the long run.
  • Student Loans:

    Student loans are specifically designed to help pay for higher education expenses. There are two types of student loans: federal and private. Federal student loans typically have lower interest rates and more flexible repayment options, while private student loans may offer higher loan amounts but require a credit check and may have higher interest rates. The most important fact to note about student loans is that unlike other loans and debts, they can only be discharged through bankruptcy under specific circumstances.
  • Home Equity Loans:

    Home equity loans allow you to borrow against the equity in your home. These loans typically have lower interest rates than personal loans and credit cards because they are secured by your home. However, if you default on the loan, you could potentially lose your home.

Things to Know Before Taking Out a Loan

Before taking out a loan, there are a few important things to consider:

  1. Your Credit Score:

    Your credit score is a key factor in determining your eligibility for a loan and the interest rate you’ll be offered. If you have a low credit score, you may be offered a higher interest rate or may not be approved for a loan at all.
  2. Your Income and Debt-to-Income Ratio:

    Lenders will also consider your income and debt-to-income ratio (DTI) when deciding whether to approve your loan application. Your DTI is the percentage of your income that goes towards paying off debt each month. A lower DTI can improve your chances of getting approved for a loan.
  3. Interest Rates and Fees:

    Before taking out a loan, it’s important to understand the interest rates and fees associated with the loan. These can vary widely depending on the type of loan and the lender, so be sure to shop around and compare offers from multiple lenders.
Tips for Navigating Loans Responsibly

Taking out a loan can be a smart way to manage your debt, but it’s important to navigate loans responsibly to avoid falling deeper into debt. Here are a few tips to keep in mind:

  1. Create a Budget: Before taking out a loan, create a budget to ensure that you can afford the monthly payments. Make sure to include the loan payment in your budget, along with all of your other expenses.
  2. Pay on Time: Late or missed loan payments can hurt your credit score and lead to additional fees and interest charges. Set up automatic payments or reminders to ensure that you never miss a payment.
  3. Avoid Borrowing More Than You Need: While it may be tempting to borrow more than you need, doing so can lead to higher interest charges and longer repayment terms. Only borrow what you need and can afford to pay back.
Downsides of Using a Personal Loan to Pay Off Credit Cards?

When you’re trying to decide whether or not to take out a loan to pay off credit card debt, there are a few things to consider. First, taking out a personal loan to pay off credit card debt can provide you with temporary relief, but it won’t address the underlying issue of why you got into so much debt in the first place. Additionally, taking out a personal loan will likely affect your credit score, even if you make all your payments on time.

  1. Your Monthly Payment May Be Higher

    Taking out a loan to pay off credit card debt can be a daunting prospect. It can help manage your debt in the short term, but it may come with a higher monthly payment. Loan payments are generally more expensive than credit card payments due to added interest rates and fees, so it is important to shop around for the best loan terms that fit your budget.

  2. You Could End Up in Greater Debt

    First, you could end up with more debt if you take out a loan to pay off the credit card debt but continue to use the cards. Once you pay off the credit card debt with a loan, you are likely to start using the cards again, accruing more debt and paying additional interest on top of the loan. After you pay off a card, you should cut the card up or take it out of your wallet. While we don’t recommend closing the card for credit score purposes, we do recommend removing the temptation if you’ve struggled in the past with over spending.

Second, taking out a loan to pay off credit card debt can come with additional fees, such as origination fees, processing fees, application fees, or other miscellaneous fees. Make sure you understand the terms of the loan before signing any documents.

Finally, if you take out a loan to pay off credit card debt, you could end up owing more if you are unable to make the monthly payments on the loan. If you take out a loan but are unable to make the payments, you may be charged late fees and additional interest, leading to a larger total balance and significant damage to your credit score.

The Best Loans for Paying Off Credit Cards

  • Personal Loans

    : Personal loans are often considered the best loan for credit card debt because they are unsecured and can be used for a variety of purposes, including debt consolidation. They typically have fixed interest rates and repayment terms, which can make it easier to budget and plan for payments. Additionally, personal loans often have lower interest rates than credit cards, making them an attractive option for those looking to save money.
  • Balance Transfer Credit Cards

    : Balance transfer credit cards are another option for consolidating credit card debt. These cards allow you to transfer your existing credit card balances to a new card with a lower interest rate. Some balance transfer cards offer 0% interest rates for a limited time, which can give you a chance to pay off your debt without accruing additional interest. However, be aware that balance transfer cards often come with balance transfer fees, which can be a percentage of the amount transferred.
  • Home Equity Loans or Lines of Credit

    : If you’re a homeowner, you may be able to use a home equity loan or line of credit to consolidate your credit card debt. Home equity loans are secured by your home and typically have lower interest rates than unsecured loans or credit cards. However, be aware that if you default on a home equity loan, you could potentially lose your home.
  • 401(k) Loans

    : If you have a 401(k) plan through your employer, you may be able to take out a loan against your account balance to pay off your credit card debt. 401(k) loans typically have lower interest rates than credit cards, and the interest you pay goes back into your account. However, be aware that if you leave your job or are laid off, you may be required to repay the loan in full within a short period of time or face penalties and taxes.
  • Credit Counseling or Debt Management Programs

    : Credit counseling or debt management programs can also be a helpful tool for managing credit card debt. These programs work by consolidating your credit card debt and negotiating with your creditors to lower your interest rates and fees. You then make a single monthly payment to the credit counseling agency, which distributes the funds to your creditors. While these programs can be effective, be aware that they may impact your credit score and may take several years to complete.

Overall, loans can be an effective tool for getting out of debt faster, but it’s essential to use them wisely. Consolidating high-interest debts, taking advantage of lower interest rates, and fixed repayment terms are some of the ways loans can help you reduce your debt burden. However, it’s crucial to shop around for the best loan rates, read the terms and conditions carefully, and make sure you can afford the payments. By doing so, you can use loans to your advantage and achieve financial freedom.