Taking a personal loan to pay off other debts might be a smart financial choice. The average interest rate on personal loans is 12.35%, which is significantly lower than the average credit card interest rate of 21.47%. If you have a bunch of other debts, paying all of them (or most of them) off with one personal loan can simplify the repayment process.
But, before you move forward with getting a personal loan to pay other creditors, there are four key steps you need to take first.
1. Figure out how much you owe
The first step is to figure out how much you owe to different creditors, so you know how much you need to borrow.
Some personal loan lenders offer loans up to $100,000, but the amount you’re going to qualify for is based on your credit score and income. Ideally, you’ll want a large enough personal loan to pay off all your other debts — otherwise, you’d have your new personal loan payment and your old debt payment to deal with.
2. Determine the interest rate on your debt versus your personal loans
Next, compare the interest rates on your current debt versus what rate you’d pay on personal loan debt. This is important because you don’t want to refinance with a personal loan at a higher rate than you’re already paying. If you had a debt at 5% and you refinanced it using a personal loan at 10%, you’d double the interest you pay each year on that debt.
Most personal loan lenders will allow you to check your rates with only a soft credit check (one that doesn’t impact your credit score). You can compare the rate you’re offered with your existing debts to ensure refinancing will save you money before moving forward.
3. Make a detailed budget plan to pay off your new personal loan
When you shop around for your personal loan, you can see what your future monthly payment would be if you took out the loan you’re thinking about. You’ll want to be absolutely sure that this payment fits into your budget.
For example, if you’d have to pay $300 a month out of your bank account toward your personal loan, be sure you can afford those payments before taking out the loan. If you can’t, you may have to borrow less, shop around for a loan with a lower rate, or get a loan with a longer repayment timeline (which would come with a lower monthly payment, but higher total interest costs over the life of the loan).
4. Make sure you have your spending under control
Finally, the last key thing to do is to make sure you have your spending under control. You do not want to use a personal loan to pay off credit cards, only to charge those cards up again and end up with both your personal loans and credit cards to pay.
If you can live on a budget and have some money saved for emergencies so you don’t have to turn to your cards when unexpected expenses happen, then moving forward with an affordable low-interest personal loan to refinance your debt could be a smart choice.
Our picks for the best personal loans
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.
