6 Important Considerations When Taking Out a Loan to Pay Off Debt

According to a recent GoBankingRates survey, 30% of Americans owe between $1,000 and $5,000 in credit card debt. If you’re dealing with unwanted debt, it can be stressful, to say the least.

You may be looking for ways to get out of debt and wondering if quick loans or personal loans are a way out. Although taking out a loan to pay off debt is a solution for some people, you want to borrow responsibly.

Here are 6 important considerations if you’re thinking of applying for a debt consolidation loan.

1. How Much Money Do I Need?

Before applying for a loan, you want to be sure about how much money you need. You want to avoid over-borrowing and getting more in debt.

Some lenders allow personal loans starting at $500, while others offer loans at a minimum of $1,000 or $2,000. If you want to borrow less than $500, it may be better to try to save that amount or borrow from a friend or family member.

If you plan to apply for a loan, know how much you need and make sure there’s room in your budget to repay your loan on time.

2. Should I Pay My Creditors or Put Money in the Bank?

If you’re taking out a personal loan, the money is typically delivered straight to your checking account. If you’re using the money to pay off credit card debt, some lenders will allow the money to go directly to the creditors instead.

If you want to pay off the debt yourself or plan to use the funds for something else, you can choose to have the money deposited into your bank account.

Have a plan for how you plan to use the money and stick to it. This will help you get your finances in order without adding to your debt.

3. What Will the Interest Be on the Loan?

Before taking out any type of loan, it’s important to consider the interest rate you will pay. This depends on a variety of factors, including the loan amount, the terms, and your credit score.

Interest rates can range anywhere from 5.99% to as much as 29.99% or even higher. Typically, the interest rate is lower if you have a good credit score. Choosing the shortest repayment terms can also be a factor.

The average APR for a 24-month personal loan is around 11.23%. This is below the average credit card APR and a big reason why many people choose to take out a loan to pay down credit card debt.

Generally, the APR for a personal loan is fixed. That means it stays the same for the life of your loan.

4. Can I Pay the Monthly Payment?

When you take out a personal loan, you may have the opportunity to choose the repayment terms. This depends on what works best for your income level and monthly expenses.

Some lenders offer an incentive to choose autopay. This can lower the APR by 0.25% or 0.50%. 

Some borrowers want their monthly payments to be as low as possible. This means it will take longer to repay the loan.

Others want to pay back the loan as quickly as possible and choose a higher monthly payment. Choosing long repayment terms and lower monthly payments may come with a higher interest rate.

To keep your debt ratio in check, you should spend no more than 35% to 43% of your income on debts. Many mortgage lenders will deny loans to individuals with a debt ratio higher than 43%.

Personal loan lenders are often a bit more forgiving, especially with proof of income and a decent credit score. Remember that stretching yourself too thin financially can lead to more debt, stress, and cash flow problems.

5. Will I Pay Fees on a Personal Loan?

Some lenders may charge an origination or sign-up fee. But most don’t charge any additional fees other than interest on your loan.

An origination fee is an upfront charge that is subtracted from your loan that pays for processing and administration fees. This fee ranges between 1% and 5%, but it’s sometimes charged as a flat fee.

For example, if you borrow $10,000 and have to pay a 5% origination fee, you would receive $9,500. The other $500 would go back to the lender.

If possible, it’s best to avoid origination fees.

6. Is My Credit Score Good Enough?

Before you apply for a loan, it’s a good idea to check your credit score. Most lenders, including online lenders, are looking for a relatively good credit score.

Some banks will approve a loan if you have a good history of paying your bills on time. Some lenders offer lower interest rates to borrowers with fair-to-average credit scores.

There are loan options available even if your credit history isn’t great. In this situation, you will likely pay higher interest rates and fees than someone with more favorable credit.

With any loan, be sure to do your research. Make sure you understand the type of loan you’re getting, the interest rate you will pay, and the repayment plan you will follow.

Taking Out a Loan to Pay Off Debt

Although taking out a loan to pay off debt isn’t the solution for everyone, it is a viable option for many people. Be sure to consider the loan amount you need to avoid over-borrowing.

Getting a personal loan can be a great way to consolidate credit card bills and begin paying off your debt. Dealing with mounting credit card bills is stressful.

Paying them off can help eliminate this stress and provide peace of mind. At FastLoanDirect, you have options.

We work with a variety of lenders to help you find the right loan for your financial needs.

Contact us today to connect with a reputable lender.