Taking Out A Personal Loan To Consolidate Credit Card Debt? Here Are 5 Tips To Help You Minimize The Interest Rate On Your Loan
Consolidating credit card debt is one of the best ways to use a personal loan. You can use the funds from a personal loan to pay for anything that you want, and paying off your credit cards is a financially smart option — personal loans often have lower interest rates than credit cards, which means that you'll lower your monthly debt payments in addition to paying less in interest by the time your debts are finally paid off.
Unfortunately, consolidating debt won't be very effective if the personal loan rates that you're offered are similar to your credit card interest rates. You'll want to get a personal loan with the lowest rates that you possibly can. In order to reduce the interest you pay on a personal loan, follow the five tips below.
1. Look for a Secured Personal Loan
One of the most effective ways to reduce the interest rate on a personal loan is to secure it with collateral. Many lenders offer secured personal loans that use a vehicle that you own as collateral. In addition, some lenders allow you to use stocks or money held in a savings account as collateral for the loan.
When you're backing a loan with collateral, the risk to the lender is reduced, and you'll receive lower personal loan rates as a result. Borrowers are less likely to default if it means that the lender will seize the collateral, and the lender will always be able to recoup some of the money they lose on a defaulted loan by seizing and selling the collateral.
If you're using your personal loan to consolidate credit card debt, the risk that you'll default on the loan and lose your collateral is quite low. You're not taking on extra debt with your secured loan — you're only consolidating the money that you already own into one account. As a result, it should be easy for you to continue to make payments throughout the lifetime of the loan, as you won't have your credit card payments to worry about anymore.
2. Inform the Lender That You're Using the Loan for Debt Consolidation
As mentioned above, you're consolidating debt with your loan rather than adding more debt to your finances, and this makes you a more attractive borrower to personal loan lenders. If you tell a loan officer that you plan to use your loan to consolidate debts, you may receive a lower personal loan rate as a result.
3. Get a Loan With an Auto-Pay Discount
It's a good idea to look for a lender who offers a personal loan rate discount if you set up automatic payments on your account. Payments will come out monthly from your checking account, and this increases the likelihood that the lender will receive their money on time each month. While the decrease in interest rate isn't gigantic, it can save you a significant amount of money when it's decreasing the rate on a personal loan that you're paying off over the course of several years.
4. Find a Co-Signer for Your Loan
If you're having trouble finding a personal loan with interest rates lower than the interest rates on your credit cards, you may want to try finding a co-signer for your loan. This can be a friend or a family member with excellent credit. They'll be responsible for paying the loan if you default on it, which reduces the risk that the lender takes on by giving a personal loan to you. When your co-signer has much better credit than you do, you'll normally be offered much lower personal loan rates from lenders.
5. Check Rates Using Lender Pre-Approval Forms
Finally, it's always a good idea to shop around for the lowest personal loan rate. However, it's important that you do this through the lender pre-approval process rather than submitting a full application. Pre-approvals only require a soft credit pull, which doesn't affect your credit score. An application requires a hard credit pull, and too many hard pulls on your credit report will temporarily lower your credit score — to lenders, it looks like you're in a serious financial bind and trying to find a quick loan wherever you can, which makes you more of a risk in their eyes. This will make your personal loan rates go up due to your credit score going down. Make sure that you shop around to find a low rate, but don't apply until you've found the lowest one.
By following the tips above, you'll be able to significantly reduce the personal loan rates that you're offered by lenders. Low rates mean lower monthly payments, and it also means that you'll pay back less money overall over the entire term of the loan. When you're trying to use a personal loan to consolidate credit card debt, keeping rates low is important — you want the monthly payment to be manageable, and you don't want to pay more in interest than you have to.