By MELANIE LOCKERT
Brace yourself for an intimidating statistic. As of June 2015, credit card debt in the U.S. totaled $906.5 billion, an average of $7841 of debt per U.S. household.
If you're one of these Americans with credit card debt, you may be making repayments with high interest rates - the average credit card interest rate is about 15 percent. But instead of dealing with sky-high interest rates, what if you could pay off your credit card debt with a much lower interest rate?
This has to be a fantasy, you might say. But you may be able to do this by using a personal loan.
What is a personal loan?
Personal loans give borrowers access to funds to use at their discretion -- in other words, they allow consumers to use these funds for personal use.
These types of loans are typically unsecured loans, meaning they don't require you to put down collateral to obtain the loan. This is unlike secured loans like mortgages or a car loans, where you typically use your home or car as security for repayment of your loan - which your lender can take if you don't make your payments.
An alternative payoff option.
While personal loans may have higher interest rates than secured loans, they often offer lower interest rates than credit cards -- some as low as six percent, though you typically will only qualify for rates this low if you have excellent credit. The average credit card interest rate is close to 15 percent, although if you have excellent credit, you may qualify for a lower interest rate.
A personal loan may be an enticing option if you have a lot of credit card debt, as it could allow you to pay off your high-interest credit card debt and then pay off the personal loan at a lower rate. Typically, as most lenders have a $1,000 to $3,000 loan minimum, personal loans are a viable option only if you have several thousand dollars of debt.
In other words, using a personal loan to pay off credit card debt could help you save money on interest and potentially get out of debt faster.
Is it the right option?
Taking out a personal loan to pay off your credit card may make financial sense in the short term. But a personal loan may not be a viable long-term solution unless the root cause of debt is addressed.
Is your debt the result of an overspending issue or a lack-of-income issue? Whatever the cause may be, consider identifying and treating the cause of debt by making lifestyle and financial changes before taking out another loan.
Beverly Harzog, consumer credit expert and author of The Debt Escape Plan, offers another alternative to personal loans. "If you have an excellent credit score, you may be better off getting a balance transfer credit card that offers a zero percent introductory APR. This way, you can pay off the debt without paying interest." Of course, this is only true if you pay off your balance before the zero percent introductory APR period expires.
If your credit score isn't high enough to qualify, though, a personal loan may be a good option. Harzog says, "Your goal is to get an interest rate lower than the one you're currently paying on your credit cards."
What are some potential issues with using a personal loan to pay off credit card debt? Shannon McLay, founder of financial services company The Financial Gym says, "It's important to note that your interest rate with a personal loan may be lower than your credit card rates; however, you're locked into a set monthly payment for a specific period of time and this monthly payment may be higher than the minimum payments on your credit cards."
So you may save money on interest, but your overall payments could be higher and present a cash flow issue. And according to McLay, if you miss payments on your personal loan, it most likely will negatively impact your credit score.
Taking out a personal loan to pay off credit card debt is an unconventional alternative that could save you money over time. If you've treated the root cause of debt and have stable cash flow, a personal loan might be an attractive option.
However, it's important to read the terms and conditions and ask a lot of questions. Harzog advises borrowers to "read the fine print carefully and look for fees, such as loan origination fees and pre-payment penalties." Loan origination fees are charged by the lender and are typically a small percentage (5 percent or less, generally) of the total loan. Pre-payment penalties are additional fees added for borrowers who pay off their loans early.
And if you decide to take out a personal loan, try to work with a reputable lender.
How can you do this? "It's a good idea to check with a local credit union or your own community bank and see if you can get a personal loan that way. There are also loan comparison sites that can help you find the best rates. When you choose a lender, check the BBB (Better Business Bureau) to see if there have been any complaints before you sign a contract," Harzog says.
In short, a personal loan can be a viable option to pay off credit card debt, but it's important to do your research and to ensure it makes financial sense for you in the long run.
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