Applying For A Loan To Pay Off Credit Card Debt
Applying for a Loan to pay off Credit Card Debts - What are Consolidation Loans and How to apply
When credit card bills pile up, the total outstanding balance can add up to a large amount and gather high interest charges payable each month. Interest you pay on your credit card debt is determined by the APR on your card (Annual Percentage Rate - explained) and can be anywhere between 14% to up to 30%. Therefore, sometimes it makes more sense to take a credit card debt consolidation loan with a lower interest rate to pay off the outstanding credit card debts. However, there are some important aspects that need to be considered.
How does a Credit Card consolidation loan work?
The concept is quite simple and works out much cheaper once implemented correctly. The idea is to take
out a loan that charges a lower interest rate and is sufficient to pay off all the credit card outstanding balances. If you have two credit cards that add up to $5000 in outstanding balance and the APR on the card is 18%, then it effectively means that you are required to pay $900 in interests every year ($5000 x 18% = $900) or $75 interest cost per month.
Now if you take out a personal loan/consolidation loan from a lender who is happy to charge you 6% interest, that means you are only required to pay $300 interest per year ($5000 x 6% = $300) or $25 per month. This is a saving of $600 instantly as can be seen and it is also easier to make one single payment every month instead of sending cheques to 3 different credit card companies every month.
Now if you take out a personal loan/consolidation loan from a lender who is happy to charge you 6% interest, that means you are only required to pay $300 interest per year ($5000 x 6% = $300) or $25 per month. This is a saving of $600 instantly as can be seen and it is also easier to make one single payment every month instead of sending cheques to 3 different credit card companies every month.
Am I eligible to apply for a credit card debt consolidation loan?
First of all, you would need to go through a credit check before you are granted any types of loans. If you have missed credit card payments in the past on more than a few occasions, it might have had an impact on your credit scoring already. Therefore, you might easily get rejected when you apply for a personal loan. Rejection may further impact your credit scoring and end up being a no win situation either way. However, if you have been on a good standing with your credit card providers, then it is definitely worth applying for a personal loan with an applicable interest rate lower than your current Credit Card APR.
If I have bad credit scoring can I still apply for a loan to pay off my credit card debts?
If you are aware that you may not be granted a personal loan, there may be other loan providers who may be willing to look at your circumstances and offer you a tailored loan to pay off your credit card debts. However, the interest rate they are likely to ask for can be higher than a standard personal loan but still work out cheaper than the APR attached to your credit card.
How to choose the right loan to pay off credit card debts
It is advisable to assess your options thoroughly before making the decision to apply for any particular loan. If you are eligible to apply for a personal loan, then you can look at any major bank and what they have got on offer. Check if any banks are running special offers or promotions. It does not always have to be the bank you have your current account with, sometimes an external bank can offer you better deals in terms of lower interest rates in order to gain your loyalty.
If you suspect that you may not be able to able to obtain a personal loan because of bad credit rating, then you can always look for debt consolidation loans. These are specifically designed for individuals who want to come out of debt quicker. Although there will be plenty of options out there, be sure to go through the small prints and loan terms and conditions. There will always be some credit card consolidation loan providers offering lower interest rates than others, so it is a good idea to take plenty of time to assess all options.
Important points to remember
Important points to remember
After you pay off your credit card debts with a loan, you will have a substantial amount of available credit again on your credit cards. Do not get tempted to exhaust the credit limits again as this will make you go round and round in circle repeating the whole process again. However, utilised with care and commitment , taking out a loan to pay off your credit card debts can be one of the best decisions you ever made to become debt free.
