Borrowing money to pay off a debt sounds kind of backwards doesn’t it? And yet, this can be an effective way to eradicate credit card debts in less time. However, it only works under certain conditions.
Ultimately, the answer to the question, “Is getting a loan to pay off debts worthwhile?” is—it depends.
Let’s take a look.
Personal Loans vs Credit Card Debt
You can get a personal loan at a much lower interest rate than you’re currently paying for most forms of credit card debt — if your credit score is strong. To get the best interest rate on a personal loan, you’ll need a credit score of 690 or better.
When you’re considering debt consolidation with a personal loan, the lower the interest rate you can get on the loan the better. Thus, it’s a good idea to see what your average interest rate is on all of your outstanding credit card debt to make sure the loan will stand you in better stead.
Of all the loans you can get for debt consolidation, the least risky is a personal loan — which is also why it’s the most difficult one for which to qualify.
Credit Card Balance Transfer Loan
While it may not appear to be a loan at first glance, transferring your outstanding balances to a credit card offering a lower interest rate, is indeed taking a loan.
This can be advantageous because many card issuers offer a grace period of 12 to 18 months at zero percent or an otherwise very low interest rate. The key to winning at this deal is to make sure you can pay off the transferred balance in full before the grace period ends. Doing so will save you all of the interest you would have paid otherwise, which will make the debt less costly to resolve.
However, you could find yourself facing an extremely high interest rate on the remaining balance if the grace period ends before you pay it off. Some transfer card loan agreements stipulate payment of interest on the entire transferred amount — going all the way back to the date of the transfer — if you don’t pay it in full before the window closes.
Home Equity Loans and Lines of Credit
One of the most risky forms of debt consolidation, home equity instruments employ the equity you’ve built up in your home to pay off your credit card debt. This essentially trades unsecured credit card debt for a loan secured against your home. That’s right, if you don’t repay these loans as agreed, you could lose your home.
The good news is they’re pretty easy to get, as long as you have the income to support repayment and suitable equity in your property. Moreover, you can often get approved for one of these even if your credit score isn’t good enough to get a personal loan. However, you must be absolutely certain you can repay these loans before you sign up. The consequences of not paying are very high.
It’s very important to understand why and how you accumulated so much credit card debt in the first place. This is critical to deciding whether debt consolidation is a good idea for you. After all, you’ll only create even more debt in the long run if the cause goes unaddressed.
The other thing about which you have to be careful is avoiding using the cards from which the balances were transferred until your consolidation loan is paid in full. This too, will only serve to create more debt.
So, is getting a loan to pay off credit card debt worthwhile? It really depends on your situation, your credit score and most of all — your ability to repay the loan.