A personal loan is a credit facility that you can avail from a financial institution to satisfy your financial requirements. You can use the money borrowed to pay for a wedding, make a big purchase or even to meet any medical bills.
However, some individuals apply for a personal loan online to pay off other debt obligations such as their credit card debt. But then, is that a wise move and should you resort to it as well? Or is it financially detrimental?
If you’re trying to find answers to these questions, then here’s some information that can help bring some much-needed clarity.
You incur a credit card debt only when you don’t pay the entire outstanding bill amount within the due date. Paying just the minimum amount due on your credit card or making just a partial payment can lead to an accumulation of debt on your credit card.
That’s not all. The unpaid outstanding amount on your credit card will start to accrue interest till the time you decide to pay it off. Usually the rate of interest on unpaid credit card outstandings is around 2% to 4% per month, which translates to 24% to 48% per year. As you can see, the rate of interest on credit card debt is significantly high.
On the other hand, the typical rate of interest on a personal loan is only somewhere around 12% to 16% per annum, which is around half of the interest on a credit card debt. This is one of the major differences between a personal loan debt and a credit card debt.
Now that you’ve seen how different credit card debt and a personal loan debt is, let’s take a look at whether you should use a personal loan to pay off your other debt. This practice is known as debt consolidation, which is a strategy where you avail a low-interest loan to pay off all your high-interest debts.
This way, not only can you save on interest and lower your financial burden, you can also consolidate multiple debts into fewer ones. And considering the fact that the interest rates on a credit card debt are almost always higher than the cost of a personal loan, you could choose to pay off credit card debt using a low-interest personal loan.
This way, you can not only enjoy lower interest payments, but also are likely to be left with more money in hand, which you can use to pay off your personal loan obligations much faster.
All said and done, before you go ahead and apply for a personal loan online, here are a few financial things that you should consider.
There’s no point in opting for a lender who offers the loan at high rates of interest since it would defeat the entire purpose of using a personal loan to pay off your credit card debt. So, before you apply for a personal loan online, make sure to pick a lender who offers the lowest interest.
A longer repayment tenure can lower your monthly EMI obligations, but would increase the total amount of interest that you pay over the tenure. So, selecting the right repayment tenure is another major thing that you should pay attention to.
As you can see, a credit card debt can be more damaging to your financial situation than a personal loan. Opting to pay it off using a personal loan is a good option that you can pursue.
That’s not all. If you’re stuck with a high interest personal loan, you can use the personal loan balance transfer feature to switch to a more lenient lender that offers low rates of interest and at better terms and conditions to reduce your overall debt as well.
