Dear Credit Card Adviser,
My wife and I have about $19,000 in credit card debt. I would like to get a personal loan to pay off the debts, but my wife does not think that’s a good idea. Is it? We would really like to have a fixed term and payoff date versus never being able to pay down the credit card debt.
People certainly have used personal loans — installment loans that you pay off at a fixed rate over a specified period of time — to pay down big debts, but there are a few ways this plan can go awry.
For starters, although personal loans typically do carry lower interest rates than credit cards, there’s a chance your credit score may not qualify you for the best ones available. If that’s the case, you could wind up inadvertently increasing the cost of your debts, particularly if you’re currently revolving a balance on a low-interest credit card.
You can find tailored personal loan offers at myBankrate.
Secondly, some personal loans are secured, meaning the lender requires you to put up collateral, such as your car, in exchange for the financing.
Credit card debt, conversely, is unsecured, “so if you can’t pay, you don’t have to worry about losing something else that’s important to you,” says Kelley Long, a Chicago-based CFP professional with Financial Finesse.
Be aware of this potential trade-off if you decide to shop around for the funding. You’ll also want to make sure that the monthly payment you’ll be locked into is well within your budget.
Most importantly, using a personal loan to pay down credit card debt works only if you don’t immediately turn around and run up new balances once you’ve paid off the old ones. Otherwise, you’ll simply end up with an installment loan and credit card payment to deal with at the end of each month.
To avoid getting caught in any of the aforementioned crossfires, you can alternately “turn your credit card bill into a fixed-rate loan,” Long says.
Use Bankrate’s calculator to figure out what your monthly payments would be if you wanted to pay off your debts by a certain date. You can implement a few simple savings tips to make sure you stick to your plan.
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