Taking a Short-Term Loan to Pay off High-Interest Debt
Is reconsolidation the right option for tackling your debt?
If you’re like most Americans, you’re carrying debt on a credit card. In fact, the average balance on a credit card is nearly $6,200, according to Experian. Plus, if you figure that most people have four cards, that’s a tremendous amount of debt. A high balance on your credit card can haunt you for months, or even years. But is taking out a short-term loan a good idea to pay off your credit card? There are advantages and disadvantages to consider.
Advantages of Reconsolidating Debt
Lower your interest rate – Although there’s no guarantee, it is possible that you can get a short-term, secured loan at a lower interest rate than on your credit card.
Consolidate your payments – trying to manage multiple credit card payments can be difficult. A short-term loan allows you to consolidate your debt on multiple cards into one, easy-to-remember monthly payment.
Lower your monthly payment – If you can get a lower interest rate on a personal loan, you’re monthly payments will likely be reduced.
Pay off your debt quicker – if you’re carrying a high balance on your credit cards, it can take a very long time to pay your balance in full. A short-term debt-consolidation loan can have terms ranging from 24 to 60 months, which allows you to pay off your debt faster.
Boost your credit score – Every time to miss a payment on your credit card, your credit score suffers. Taking out a personal loan may improve your credit score if you make payments on a timely basis by showing credit agencies you are able to manage your debt responsibly.
Disadvantages of Reconsolidating Debt
You continue to rack up debt – By paying off your credit card balance with a short-term loan, you have basically freed up your credit card to make purchases again. That can lead to an additional burden of debt and make your finances worse rather than better.
You might not qualify – If your credit score isn’t at least 525, you may not qualify for a personal loan, and if you do, you may pay higher interest than on your credit card.
Increase in your monthly payment – Credit cards may charge higher interest, but they do offer a bit more flexibility to make payments. Most personal loans have to be paid back in 24 to 60 months, whereas you can hold a balance on your credit card indefinitely.
Loan fees – Some lenders charge fees, like an origination fee or an administrative fee. These costs are added to your loan amount. For instance, if you take out a $3,000 loan that has a 2% origination fee, you’ll pay $60 upfront. That may not sound like much, but it is a fee you’ll have to pay back.
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Kathryn Pomroy is a journalist and writer specializing in personal finance, consumer banking, credit cards, and loans. She has written for LendingTree, Money Crashers, Quickbooks/Intuit and Bankrate.
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