Debt Matters: How to Save Money Every Month with a Personal Loan
Reading time: 4 Minutes
March 18th, 2021
If you're carrying revolving balances on one or more of your credit cards, you might be wondering how to start paying down your debt, and save money, too.
Using a personal loan for debt consolidation may be just the solution you're looking for. That's because, even if you're comfortable making your credit card payments each month, the interest you're paying on the revolving balances can add up quickly, especially if your cards have interest rates in the high teens or more (the average credit card interest is 16%). If you're able to convert that high-interest debt into lower interest debt, you'll immediately be paying less money toward interest, meaning you'll be able to pay down your overall debt faster.
How Debt Consolidation Works
Here's the basic concept behind debt consolidation: You apply for a personal loan in the amount that you owe on your credit cards, and use that money to pay them all off. Your loan will likely have an interest rate of between 7 percent and 13 percent, much lower than what you pay on your credit cards.
That lower interest rate can translate to less overall interest paid and a lower monthly payment, too. Even if you keep paying the same amount each month as you did when making all of your individual credit card payments, you'll pay down your debt faster with a debt consolidation loan than if you'd kept making the payments individually to each credit card.
What Would Your Savings Look Like?
When you use a personal loan for debt consolidation, the savings can really add up. Here's a look at how your monthly payments and total debt cost might look with $10,000 in credit card debt across three different cards.
Note: figures below assume a minimum monthly payment equal to 4 percent of your statement balance.
If you were to take out a debt consolidation loan for that same $10,000 at an APR between 7 percent and 12.5 percent, here's how those figures would change:
In this example, consolidating debt with a personal loan will give you a lower monthly payment, allow you to pay off your debt in three years, and save you at least $2,700 in interest.
Are there Additional Benefits to a Personal Loan for Debt Consolidation?
In addition to being one of the best ways to save money, debt consolidation with a personal loan comes with other fringe benefits that can help your finances.
- Simplify your bill paying routine: When you consolidate several credit card balances into a personal loan, you'll say goodbye to multiple payments each month and enjoy the convenience of a single monthly payment.
- Boost your credit score: Credit bureaus like to see that consumers have a mix of different kinds of debt. Taking on a personal loan can diversify the debt mix on your credit report and potentially boost your credit score.
- Free up cash for emergencies and savings: By offering lower monthly payments and a shorter repayment term, debt consolidation can help free up cash to add to your emergency fund. A well-stocked emergency fund can help prevent the need to use credit cards when the unexpected hits. Once you have a well-stocked emergency fund, you can use the extra cash each month to advance your other savings goals. No matter your goals—from retirement and educational savings to a remodeling project on your house—having extra cash on hand can really help.
What Do I Need to Get Started?
Debt consolidation can be a great strategy for saving money and paying down credit card debt, but it's not for everyone. You'll need a few things to make it work for you.
- A good credit score: In order to qualify for a personal loan, you'll likely need a credit score of at least 650 or higher. And the best rates on debt consolidation loans are available to consumers with a 700 credit score or higher. If you don't know your score, head over to Free Annual Credit Report and get yours once per year at no cost.
- The ability to make your payments on time: If you're struggling to make your monthly credit card payments on time, debt consolidation may not be the right answer for you. Your first step should be to reach out to your current creditors to negotiate a repayment agreement that works for your budget.
- A commitment to stop spending on your high-interest credit cards: Debt consolidation only works if you commit to not taking on new debt. Don't be tempted by your newly-available credit and run those balances up again—you could end up in a worse situation than when you started.
To get started consolidating your debt, it's easier than ever to apply for a personal loan online at Bank of Hawaii. Take a look at our offerings and find a personal loan option that works for you.
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