If you have a lot of high interest debt, taking out a personal loan could be your first step toward financial freedom.
Let me be clear. The only reason to take out a personal loan is to get a lower interest rate. You're taking out the personal loan to pay off high interest debt. Essentially, you're swapping a high interest rate for a lower interest rate.
Fact: You cannot borrow your way out of debt.
Trading credit card debt for a personal loan could change your payments from $800+ per month to $400+ per month, jumpstarting your debt snowball.
That said, trading $40,000+ of credit card debt with 25% APR for $40,000+ on a personal loan with 5-10% APR could save you thousands of dollars of interest each year. When you're so far in debt that you're considering bankruptcy, those numbers matter. Trading credit card debt for a personal loan could change your payments from $800+ per month to $400+ per month, jumpstarting your debt snowball.
How are personal loan rates calculated?
Loan providers deal in security, just like you and me. They want financial security for their companies and charge a premium for it.
To figure out your interest rate, they look at a few factors:
How much you're asking for
Credit score
Debt-to-income ratio
Credit history over 3-5 years
Annual income
Think of each of these as levers. The more you're asking to borrow, the more important your credit score and all the other factors are. It's a balancing act. If you have a lower than average credit score, that signals to the lender that they might not get all their money back, so they will likely raise the interest rate. If your debt-to-income ratio is close to 43%, lenders are likely to decline your loan application, unless you let them know that this loan is to pay off credit card debt. You see, that keeps your debt-to-income ratio the same.
If you have bad credit, expect a high APR. At this point, I don't recommend taking out a loan at all, because you're not trading a high APR for a low APR. You're not saving any money. Instead, please schedule a complimentary (free) consultation with our financial coaches at saverstreet.com. We'll help you get out of debt quickly. You have other options. We'll find them with you.
Do NOT get a loan with over 15% APR. You have better options.
Where to get a personal loan
If you have an average or above average credit score, a lower debt-to-income ratio (less than 30%), and are asking for less than $25,000 in a personal loan, then you should be able to get an interest rate that's less than 10% on a personal loan.
Do NOT get a loan with over 15% APR. You have better options.
Hop over to NerdWallet and find the most current online personal loan providers. They outline the factors each loan provider looks for and gives you an active link to start.
Remember, every inquiry into a new line of credit will affect your credit score. Don't apply for multiple loans if you can help it. Instead, apply for the one you think will give you the best rates based on the factors they look for.
How to get out of debt for good
The whole point in getting a personal loan is to trade your high interest rate or APR for a lower APR. Sometimes this isn't possible.
You have better options. I've worked with enough people to know that there's a better option in 99% of cases. Here's a few tactical ways to get out of debt:
Work overtime
Pick up a second job
Stop all subscriptions
Stop eating out
Meal plan (subscribe to my website and get a sample meal plan)
Sell (almost) all your stuff
Negotiate with your creditors
Getting out of debt will change your life. You will sleep better, laugh more, and see the world in a brighter way. You'll be able to give to people who need it. Being debt free is a freedom I want the world to know.
The options above are just a few ways I've helped clients earn more, save more, and get out of debt. There are other options. Book a complimentary consultation with a financial coach to find out how you can get out of debt for good. You'll be glad you did.
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