If you have credit card debt, you’re probably worried about getting it paid off. However, if you’re like many Americans, while your intentions are good, you just can’t seem to get a handle on your finances. Most Americans carry a significant amount of credit card debt. The average balance on credit cards held by a consumer is $6,348.00, according to Experian. While Americans are finding themselves in better shape financially than they have been in the last decade, credit card debt remains a stubborn problem for the average consumer. Revolving debt is continuing to rise, despite a roaring economy, fat 401(k) accounts, and rising wages.
Is a Personal Loan Right for You?
Many debt-strapped Americans have turned to personal loans as a way to consolidate their debts. This is a viable option if you can qualify for a good interest rate. With a lower interest rate, compared to the high rates of credit cards, you could save quite a bit each month. Unfortunately, qualifying for a rate that makes it worthwhile may prove difficult for those with high levels of debt, as they likely have already taken a credit hit.
Before applying for a personal loan, consider all aspects. You can obtain a personal loan from a bank, a credit union, or an online lender. How much you’ll qualify for will depend upon the type of lender you choose, your credit score, your income, and other factors.
Generally, you can get a personal loan ranging in amounts from around $1,000 up to $35,000 or more if you have excellent credit. If your credit card debt is high and you’re unable to secure enough loan proceeds based on your credit, you may have to apply for a secured loan instead, which puts your assets at risk. The payback period for a personal loan is usually 3-10 years.
Another drawback of a personal loan is that most lenders charge an origination fee to write the loan, which can be up to 10% of the loan amount. You’ll need to consider this added expense when determining if a personal loan is the way to go. Thankfully, you do have other options for reducing an excessive debt load.
Balance Transfer Credit Cards
One way to consolidate credit card debt is to transfer the balances to a single card that offers a 0% introductory offer. If you choose to go this route, make sure you’re aware of how long the introductory period lasts, as carrying a balance past that date could result in retroactive interest being applied, and the new rate after that period is likely to be extremely high. Additionally, be aware that some transfer cards charge a fee in the 3-5% range to process the transfers.
Using a Debt Consolidation Loan to Pay Down Your Debt
One of the advantages of a debt consolidation loan is that, unlike credit card debts, it has a fixed payment and a defined repayment period. Most have terms between three and five years, giving you a target date of when you’ll be free from debt. The repayment structure of credit cards is inherently built to lure consumers into the minimum payment trap, ensuring they carry a balance virtually forever. A debt consolidation loan frees you from this. For many, though, the higher payment with a consolidation loan is too much too handle, in which case debt settlement is a better option. A trusted financial partner will work with you to accrue money in an account that it uses to pay off your debts at a fraction of their balance.
Evaluate Why You Got into Debt
Before agreeing to any type of loan, take time to evaluate how you got into trouble in the first place.
Were you hit with an unexpected medical bill?
Did a wage earner lose a job?
Were you living beyond your means?
No matter the answer, it was probably avoidable, either by having an emergency fund to get through times or by monitoring your spending a bit better. When the monthly cash flow is unable to cover bills and expenses, consumers turn to credit cards to fill the gap, and this is when trouble arises.
This is a good place to emphasize the importance of having a budget. Sit down with your family and devise a plan to cover your expenses each month without turning to credit, hopefully with a bit of money left over that you can then divert to an emergency fund.
In the grand scheme of things, a personal loan is rarely the best choice. Those with high levels of debt are likely already behind the ball in terms of credit, meaning they’ll be unable to secure a rate that saves much money. Many have to turn to a secured personal loan, which could put a home or car at risk if they’re unable to fulfill your obligation. For many, the ideal choice isn’t a debt consolidation loan, but one of many other options, like debt settlement. Before you decide to take out a loan, make sure to explore all your options.
Adam Tijerina is a personal finance expert for National Debt Relief, a BBB A+ accredited business offering debt settlement services since 2009. Adam knows a thing or two about debt resolution after successfully settling $43,250 in credit card debt on his own. He has also co-authored two books about overcoming adversity and has been featured on Credit.com and USNews.com. Adam holds a Bachelor’s Degree from Trinity University and lives in Texas with his wife and four children.
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