A significant challenge the American economy and society faces is households’ staggering debt levels (including credit card debts). As per an estimate, the country’s total household debt has reached an unprecedented level of $16.9 trillion at the end of 2022. This debt can include mortgage, auto loan, education loan (student loan) and credit card debt. Taking a personal loan to pay off debt can be helpful in certain scenarios.
The statistics show the urgent need to consolidate such debt; interestingly, there can be a simple way of doing this. Whether you have high debt obligations or are looking for personal finance tips, this guide will help with ways to pay off your debt, including using personal loans. Use Beem to check personalized rates and explore loan options ranging from $500 to $100,000.
How to Get a Personal Loan?
Let’s start with the basic things first. A personal loan is an effective method to consolidate and pay off debt. Here is how one can get a personal loan in the US:
- Evaluating Personal Loan Requirements: The first step is to evaluate the personal loan requirements. Take account of the debt levels, current rate of interest and the repayment terms and conditions. Based on these evaluations, you can easily apply for a personal loan.
- Evaluating the Credit Score: The chances of getting a loan increase rapidly if one has a high credit score. Hence, an individual should know the score and do everything to ensure the credit score is high.
- Research and Compare Lenders: A wide range of banking and financial institutions offer different types of personal loans. Evaluating the repayment terms, interest rate and other factors is critical before selecting a personal loan.
- Applying and Reviewing the Offer: After the research is completed, it is recommended to apply for a personal loan and review the offer provided by the bank.
- Accept the Loan and Remember the Purpose: Always remember the purpose of repaying the debt or consolidation of debt for which the personal loan has been taken.
Why Use a Personal Loan to Pay Off Debt?
Understanding why you should use a personal loan to pay off debt is essential. If you have a high level of debt due to several financial obligations, the best way shall be to consolidate it by paying a few.
Some debt components, such as credit cards, can have an extremely high-interest rate. This implies that if a person continues to owe banks and financial institutions credit card outstanding amounts, the overall chances of default shall increase. Hence, utilizing personal loans to pay off such high-interest loans is always advisable. Personal loans come at a lower interest rate than such loan components.
An individual may not have a steady income source or cash flow mechanism. In such circumstances, when a person wants to get debt-free, one of the most apparent mechanisms is through availing of personal loans.
Benefits of Using Personal Loan to Pay Off Debt
After understanding why a personal loan can be used to pay off a debt, the next part covers its key benefits. These include:
Personal loans have lower interest rates
From a general perspective, a personal loan has a significantly lower interest rate than unsecured loans and credit cards (in the US). Hence, making such loans to benefit from the interest rate gap is wiser.
Fixed Repayment Schedule
Unlike revolving credit card debt, personal loans have a fixed repayment schedule. This provides certainty about when the debt will be paid off.
No Collateral Requirement
Availing a personal loan can be easy as it is an unsecured loan with no collateral requirement. In such conditions, the process of onboarding and exiting is relatively straightforward.
Improvement in Credit Score
With debt consolidation, the overall credit score of an individual improves rapidly, provided the loan installments are paid within specified timelines.
Due to paying off different categories of loans and debts, more severe consequences of debt, like foreclosure or bankruptcy, could be avoided. It eventually leads to better financial discipline in an individual.
How to Use Personal Loan to Pay Off Debt
After talking about the importance of debt consolidation occasionally, let’s explore how to use a personal loan to pay off debt:
- Debt Consolidation: The first step is utilizing personal loans to pay off smaller debts such as credit cards, payday loans, etc. Hence, rather than having multiple loans with different repayment dates, conditions and interest rates, an individual has a single loan with a uniform interest rate and repayment schedule.
- Prioritize High-Interest Loans: Paying off high-interest loans before anything else is critical. This strategy, known as the ‘avalanche method,’ can save you money in the long run.
- Maintain Timely Payments: The installments of the new loans must be repaid within the deadlines to avoid any penalties.
- Avoiding New Loans and Making a Budget: Financial discipline and ensuring no new loans are taken up after consolidation are equally essential.
- Emergency Fund: If possible, set aside a portion of the loan for emergencies to avoid future debt.
Debts are not suitable for an individual’s financial goals and planning. America has high debt levels, which means it is an issue of national interest. There are different strategies, such as budgetary control and financial planning, based on which debt repayment and consolidation could be possible. Consider using a personal loan to pay off debt as a valuable strategy that can simplify your financial landscape. It can facilitate limiting your overall interest payments and improving your credit score. Check out Beem to understand your options among several lenders and improve your creditworthiness to enhance your chances of getting a personal loan that meets your needs.
However, it is also critical to use the strategy optimally, as availing another loan to pay off current debt could backfire, and this strategy can easily lead to an increasing debt burden on an individual.