How to Use a Personal Loan to Pay Off Debt
Debt is ugly business. The more debt you have, the less freedom you have with your own finances and your life overall. It can be hard to break free of the debt cycle – taking out new cards when old credit cards fill up. Paying off a loan with a credit card and paying more fees and interest over time.
It may be hard but it is possible to clear your credit card debt, especially if you choose to use a personal loan to pay off debt. Here’s how it works.
Apply for an unsecured personal loan.
A personal loan is a cross between a credit card and a car loan. A car loan is arranged to buy a car – a secured loan that is tied to the car itself. If you don’t pay the loan, the bank takes the car back. If you pay the loan on time every month, at the end of the terms you own the car.
A credit card is an unsecured line of credit that is not tied to a new car or any other asset. The bank trusts you to repay the loan and allows you to keep using the card if you make payments. An unsecured personal loan is a loan with set payments, like the car loan, that isn’t tied to any asset, like a credit card. There are secured personal loans as well. Those are typically tied to your home equity or your car title.
You take out an unsecured personal loan much like you apply for a credit card. Fill out the application, get approved and then the loan is funded. Rather than a credit card, however, the funds are sent to your bank account where you can use them for the purpose you’ve indicated in the application. The personal loan can be used to pay for medical expenses, start a new business or, for many of us, to pay off debt.
Pay off your debts.
When you apply for a personal loan to pay off debt, you should apply for a loan in the amount of the debt. Have $10,000 in credit card debt? Get a loan for $10,000. The loan application can be done online in many cases and once the loan is approved, the funds will be sent electronically to your bank where they will appear like a direct deposit.
When the loan is funded, you will have a large sum in your bank account. You can use those funds to immediately pay off all of your debt. You can clear out your medical debts or credit card debts in a single sitting if you pay everything online. Be careful to not get careless with the funds when they arrive – it can be tempting when a large amount of money appears in your bank account. Follow your plan and pay your debts immediately.
Start making personal loan payments
Once you’ve cleared off all of your debts and credit card payments, you won’t owe any more money to the credit cards or other lenders (provided you don’t charge new purchases on the credit card or take on new debts.)
With a personal loan to pay off debt you will have a single loan payable to a single vendor. The personal loan comes with fixed payments, much like a car loan, so you will now start making those payments on a regular basis. But instead of buying a car, you will be buying financial freedom by paying off all of those old debts.
The larger the loan, the larger the monthly payment, of course. But if you were making minimum payments on various other debts, you may find that the single payment for the personal loan is still less than all of those smaller minimum payments combined.
Make Your Payments
Make your payments on your personal loan every month, on time, and you will see a reduction in how much you owe. In a short amount of time you will start to see the balance of your personal loan decrease. After all, this is not a credit card that you keep filling up with new charges. Every payment is reducing your debt and getting you one step closer to being debt free.
When you have finished making payments on the personal loan, you will have finished paying off your debt. If you managed to avoid taking on any new debt during the repayment period, you may be completely debt free and have hundreds of extra dollars every month to save or use for other important things.
What to Know About Personal Loans
Learn how to apply and what you need to know about your credit score or bad credit.