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How to get a loan to pay off debt

how to get a loan to pay off debt

You can get a loan to pay off debt by finding lenders that offer debt consolidation loans or credit card consolidation loans and submitting a loan application. These loans typically offer high loan amounts that allow borrowers to pay off multiple debts with one loan.  

Are you going through financial hardship and thinking, “I’m drowning in debt, how do I get out?” Know that you are not alone. The average American owes about $90,460 in debt!1 If you are feeling like your bills are getting out of control, a debt consolidation loan could help you get your finances back on track. 

What Is Debt Consolidation?

Debt consolidation, also known as refinancing, takes multiple debts and combines them into a new loan. Instead of making multiple payments on existing debt, refinancing allows people to stay on top of debt with one monthly payment. 

Debt consolidation differs from debt settlement, especially considering the effect each has on a person’s credit score. When borrowers consolidate debt, they effectively pay off their debts and transfer everything into one debt consolidation loan. Eventually, when they pay off that loan, they should see an increase in their credit score over time. 

When borrowers settle debt, they inform financial institutions that they are unable to pay off their debts. Since debt settlement is often an indicator of bankruptcy, it can have a significantly negative impact on a person’s credit history. 

Consolidating debt is by far a better option than setting debt. Refinancing with a debt consolidation loan can come with awesome benefits such as lower interest rates, a more flexible loan term, and even a higher loan amount! 

Pros and Cons of Debt Consolidation 

Pros of Debt ConsolidationCons of Debt Consolidation
Simplified Payments: One monthly payment instead of juggling multiple bills.Higher Overall Cost: Depending on the loan’s terms and duration, you might end up paying more in interest over time.
Fixed Interest Rate: Predictable and often lower than credit card rates.Fees: Some consolidation loans come with origination fees or prepayment penalties.
Improved Credit Score: Over time, as you pay down the debt consistently.Temporary Credit Score Dip: Initial credit inquiry can cause a small decrease in your score.
Potential for Lower Monthly Payment: Can make debt management more manageable in the short term.Temptation to Accumulate More Debt: With credit cards paid off, there might be a temptation to use them again.
Clear End Date: You’ll know exactly when the debt will be paid off.Collateral Risk: If you use a secured loan, you risk losing the asset (like your home) if you default.
Psychological Relief: Reducing multiple debts can alleviate stress.Not a Complete Financial Solution: Consolidation doesn’t address the root causes of debt or encourage budgeting habits.

What Type of Debt Can I Consolidate?  

Below are some of the most common forms of debt borrowers can take care of with a debt consolidation loan. 

Credit Card Debt 

Credit card debt is one of the main causes of the young American debt crisis. Since credit cards are a form of revolving debt, it can become easy to rely on your credit card accounts to take care of monthly or recurring payments. But, unless you zero out your credit card balances quickly, interest rates may make it extremely difficult to pay off credit card debt completely. 

If you are scrambling to keep up with multiple credit card payments, credit card refinancing with a debt consolidation loan may be the perfect financial solution!

Past Due Bills and Payments

If you have multiple loans, balances, or other financial responsibilities you are having trouble keeping up with, debt consolidation is definitely something you should consider. Having late or missed payments can put a strain on your credit reports for up to seven years! Instead of racking up late fees and missing your payments, try combining everything into one easy debt consolidation loan. 

Inconvenient Loans 

Sometimes people feel like they have no other option for immediate cash other than quick payday loans, title loans, cash advance loans, or other unreliable forms of funding. Unfortunately, these loan options often leave people in more debt than they started out in. Loans with a high-interest rate and brief loan term are notoriously difficult to pay off, especially when they come with hindrances like prepayment penalties that stick people with unnecessary charges just for trying to pay off their loan early. Thankfully, there are companies that pay off title loans and other debts so you can work towards achieving financial freedom. 

How Does Getting a Personal Loan To Pay Off Debt Work?

Getting a personal loan to pay off debt is fast and straightforward, especially with online and mobile banking options available. To begin, fill out a quick application on your lender’s website. This initial form will ask you for information like your name, address, as well as a few financial details. 

After your lender accepts your application, they will ask for several pieces of documentation. Most lenders will ask for: 

  • Photo ID issued by the U.S. or state government 
  • Proof of sufficient income to pay off the loan
  • Proof of residency
  • Bank account and routing number for direct deposit 

Once your lender accepts your documents, they will send you a loan contract to sign. Your loan contract will contain details about your loan like your interest rates, payback terms, approved loan amount, as well as other charges like origination fees. An origination fee is a charge some lenders require at the time of a contract signing. 

Read your contract and make sure you understand everything. If you feel comfortable with your loan details, sign the agreement! At that point, you should expect your personal loan funds in your bank account within 24 hours or less. 

Types of Debt Consolidation Loans 

When it comes to getting debt consolidation loans, convenience is key. Perks like a fixed interest rate and flexible terms can make consolidating debt a stress-free experience. If you have multiple forms of debt, a personal loan may be the best option to consolidate everything. 

Personal loans are convenient because they can be used for virtually anything the borrower wants. Funding like student loans or a home equity loan has strict requirements for what borrowers may spend their money on, but not personal loans. 

Personal Loans 

If you are looking for a debt consolidation loan, consider using a personal loan to pay off high-cost personal debt. Personal loan lenders typically offer decent interest rates and flexible requirements. Personal loans come in many different forms, such as: 

Below is more information on some of the financial products so you can decide if you want to try using a personal loan to pay off debt. 

Installment Loans 

One of the most versatile types of funding is an installment loan. Installment loans typically come with a fixed rate, resulting in a fixed monthly payment. These fixed payments make planning out your payback schedule for an installment loan extremely easy since each payment should be roughly the same. Furthermore, many types of installment loans are available for people with a wide range of credit scores, meaning people with high or low scores can easily get approved. 

Bank Loans 

Using a personal loan from a bank is a viable option if you have an excellent credit score. Banks are traditional lenders, which usually indicates that they will only accept applicants with very good credit. Applicants with a less than perfect credit score are likely better off going with another personal loan option.  

Credit Union Loans 

A credit union is another financial institution where borrowers may be able to find personal loans to consolidate debt. Many credit unions are niche neighborhood lenders, which means they may only accept applicants who live in a certain city or meet strict criteria. Also, since credit unions are often small local lenders, they may not offer online banking options. 

Other Ways To Pay Off Debt

Perhaps you don’t want a new personal loan. That’s okay! Taking out a loan is an important financial decision, and you should only do so if you feel comfortable with the situation. Try these helpful tips to become debt-free and save money without having to take out a debt consolidation loan. 

Create a Debt Repayment Plan

Instead of taking out a loan, perhaps you just need to go about paying off your debts differently. The debt snowball or debt avalanche methods are two great ways to create a debt management plan. The debt snowball method is when borrowers pay off their smallest debts first and work their way up to paying off their largest debts. The debt avalanche method is the opposite, where borrowers pay off their largest debts first and work their way down to their smallest debts. 

You can pay off debt faster by making more than your minimum payments due. Instead of paying the bare minimum on your monthly payments, try to put in a bit extra. These increased payments will help you save on interest charges and ultimately help you pay off debt faster. 

Hone in Impulse Spending

How many times have you let food in your fridge go bad because you ordered takeout instead of eating what you have at home? Or, how often do you make purchases online without giving it a second thought? Impulse spending can significantly hold you back from having extra money or even being able to stay on top of your financial obligations. 

Utilizing practices like the 30 days rule can help you control your spending and save more. With the 30-day rule, you wait a month (or about 30 days) before making any unplanned purchases. Having this time to think about what you are spending your money on will help you avoid impulse purchases and purposefully utilize your money. 

Get a Side Gig Temporarily 

Depending on how much debt you have, a side job can help you get the debt relief you need. Having a side hustle for just a few months can help give you a few hundred or even a few thousand extra dollars to put towards your outstanding debts. 

FAQs About Using Loans To Pay Off Debt 

What is the primary purpose of using a personal loan for debt consolidation?

The main goal is to combine multiple debts, especially credit card debts, into a single personal loan with fixed payments, often at a lower interest rate. This can simplify your finances and potentially save you money.

How can consolidating credit card debt with a personal loan affect my credit score?

Initially, applying for a personal loan can cause a small dip in your credit score due to the credit inquiry. However, over time, as you pay off credit card balances and reduce your credit utilization, your score may improve.

Can I use a personal loan to pay off other types of debts besides credit cards?

Yes, while many people use personal loans to pay off credit card debt, you can also use personal loans to consolidate other types of debts, such as medical bills or other loans.

Is it better to get a personal loan or a balance transfer credit card to consolidate credit card debt?

It depends on your financial situation. A balance transfer credit card might offer a 0% introductory rate, but it’s temporary. In addition, you will likely have to pay a balance transfer fee. On the other hand, a personal loan might have a fixed interest rate for the loan’s duration and less fees. Consider factors like the amount of debt, the time you’ll need to repay, and potential fees.

How do monthly payments for debt consolidation loans compare to my current credit card payments?

Typically, the monthly payment for a loan is fixed, making it predictable. Depending on the loan’s terms and interest rate, this payment might be lower than the combined minimum payments of your credit cards.

What happens to my credit cards after I use a personal loan to pay them off?

Your credit card accounts remain open unless you decide to close them. However, it’s essential to avoid accumulating new debt on these cards to prevent falling back into a debt cycle.

Are there any fees associated with personal loans for debt consolidation?

Some lenders might charge origination fees, late payment fees, or prepayment penalties. Always read the loan agreement carefully to understand any associated costs.

How long does it typically take to get a personal loan for debt consolidation?

The process varies by lender, but many online lenders offer quick approval and can deposit funds into your account within a few days.

Will consolidating my debts with a personal loan stop creditors from calling?

Once you use a personal loan to pay off your other debts, those accounts will be settled. Creditors for those paid-off accounts should stop contacting you. However, ensure you continue making timely payments on your new consolidation loan.

What should I consider before deciding to consolidate credit card debt with a personal loan?

Evaluate the interest rate, loan term, monthly payment, and any fees. Also, consider your financial discipline; consolidating debt can be beneficial, but it’s crucial to avoid accumulating new debt simultaneously.

Takeaway Note From CreditNinja on Using a Loan To Pay Off Debt

Debt consolidation loans can help borrowers pay off credit card debt and other high interest debt. But it’s important to pay attention to the loan terms to avoid getting into a worse financial situation. 

Personal loans are one of the most common loan options for debt consolidation. If you are looking for a lender, consider CreditNinja! We offer competitive rates on our online loans and exclusive perks designed to benefit our customers. Apply with CreditNinja online today to see if you qualify!  

References:

  1. COVID-19 has burdened many Americans with debt │ The Fayetteville Observer
  2. Demographics of Debt │ Debt.org
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