If you're becoming overwhelmed with credit card debt, a personal loan may seem like a viable option. Since most personal loans provide consumers with lower interest rates, this may seem like a more viable solution in helping you pay down your debts. Before you decide to take a personal loan to pay off your plastic, consider the differences between credit card debt and personal loans.
Most personal loans come with a limited repayment term. This means that your loan might last for two, three, four, or even five years maximum. Your monthly payments will be divided into equal amounts based on the repayment length of your loan and your approved interest rate. With credit cards, there is no set time limit for repayment. If you decide to take a personal loan, you'll be expected to pay it off within the confines of the loan's time frame.
Consider Minimum Payments
Even if you secure a personal loan at a lower interest rate, your monthly payments could increase since the loan's lifespan will be shorter. A good way to determine if this option is right for you is to add up what you're currently paying per month on all of your credit cards. If you receive a loan at a great rate with an amount that will pay off all of your cards at once, it may be a great choice in the long run if the payments stay the same amount or less. You don't want to take away from your disposable income to pay down debt unless you have a financial plan in place that accommodates a larger monthly payment.
Impact On Credit Score
Taking a personal loan has both positive and negative impacts on your credit score. If you're using the loan to pay off credit card debt, it can be highly beneficial to your score since it will show that you've successfully paid off a large amount of unsecured debt. The negative aspect of getting a personal loan is that you'll receive another "hard pull" or inquiry on your credit report, but this should not bring your overall score down by too many points. Remember to keep your credit card accounts open, even if you've paid them all off. Leaving available credit with low or no balance is highly beneficial to your credit rating. If you're considering using a personal loan from a bank like Community Resource Bank to pay off your credit card debt, think about the ways it will affect your credit and income before you apply.