How Personal Loans Help Some Consumers Pay Off Debt Faster

Blog posted On November 27, 2019

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When you’re getting ready to apply for a mortgage, you’re going to want to improve your credit score and lower your debt-to-income ratio if needed.  Lenders use financial data like your credit score and your debt-to-income ratio to evaluate how you manage your other debt and determine your interest rate. 

Credit reporting bureau, TransUnion, found consumers who consolidated their credit card debt with a personal loan, tended to pay off their debt faster, and improve their credit score by at least 20 points.  The study revealed, consumers who used a personal loan to consolidate their credit card debt were able to reduce average balances from $14,015 to $5,855.  68% of these consumers saw their credit score improve by more than 20 points.  The increase was distributed across all credit tiers, with those in the lower tiers seeing the biggest boosts.  84% of subprime consumers saw an increase, 77% of near prime, 68% of prime, 51% of prime plus, and 15% of super prime. 

If you are buying a home within the next few months you should hold off on any big financial changes like applying for a new line of credit or changing jobs.  Most mortgage professionals recommend starting credit repair six months to one year before you apply for a mortgage.  Every financial situation is unique, and you should consult a financial advisor before making any changes. 

One way to improve your credit score and start lowering your debt-to-income ratio is to consolidate your debt with a personal loan.  Personal loans are available through traditional banks and direct lenders.  Interests rates will vary based on your financial profile, but typically an unsecured personal loan will have a lower interest rate than your credit card company.  A personal loan only makes sense if the debt you are consolidating has a higher interest rate than the personal loan.   

Advantages of a Personal Loan

  • Lower interest rate – credit cards usually have an Annual Percentage Rate (APR) ranging from 10 to 25%. Each month you are not only paying down your balance, you’re also paying down heavy interest payments.  Most personal loans have interest rates as low as 5.99% depending on the borrower’s financial profile. 
  • Fixed monthly payment – a personal loan with a fixed interest rate will have the same payment each month, whereas a credit card payment fluctuates from month-to-month because it has a variable interest rate. A fixed monthly payment makes it easier to plan your debt repayment into your budget.
  • Lots of options – personal loans are offered by direct lenders, traditional banks, and digital banks. You can shop around and find a reputable lender that offers you the best rate and terms.

In some cases, a personal loan can be the best option for you to pay down credit card debt, lower your debt-to-income ratio, and improve your credit score.  If you have any questions about your debt-to-income ratio or credit score, please let me know.  Remember, don’t make any big financial changes shortly before you apply for a mortgage or during the application process. 


Sources: Forbes