What do you do with debts that have unfavorable interest rates or difficult payment terms? If you can, consolidate them into one debt stream with more favorable terms. Balance transfer credit cards exist for this purpose, but personal loans may be an even better alternative.
November 2018 data from LendingTree shows that over two-thirds of all personal loan inquiries are for debt consolidation (37%) or credit card refinancing (31%). Personal loans generally offer lower interest rates for equivalent credit profiles, and consumers are taking advantage of the difference.
The lowest average annual percentage rate (APR) for all credit cards is 17.15% according to CreditCards.com, and balance transfer cards aren’t much better at a 16.33% average lowest APR offer. According to LendingTree, borrowers with excellent credit averaged 9.62% APR on personal loans.
With credit scores of 760 or above, these borrowers are the ones most likely to qualify for the lowest APRs in any borrowing scenario – but what about other credit categories? Differences exist, but overall credit profiles become more important.
The average personal loan APR offered to consumers in the 720-759 credit score range was 12.39% – but borrowers with the top 10% of credit profiles within that range averaged 5.89% APR, less than half the average rate for that band. Similarly, in the 680-719 scoring range, the average APR was 18.52% while the top 10% were offered 7.26%, and in the 640-679 range, the average APR was 25.87% while the top 10% were offered 12.31%.
For expenses like weddings, vacations, or medical emergencies, a personal loan can be a great alternative to carrying a large credit card balance. Personal loans may also make sense for smaller but substantial expenses, especially if the alternative is a cash advance on your credit card. Cash advances can carry significantly higher APRs than standard purchases.
What’s the downside of a personal loan? Since they’re usually unsecured against any collateral, they tend to have higher interest rates than secured loans (such as auto loans or home equity loans/lines of credit) for the same credit profile. Student loan interest rates are also typically lower than personal loans, making consolidation unprofitable. If you’re trying to consolidate debt that isn’t dominated by higher-interest credit card debt, it may be hard to find a better deal than the one you already have.
Personal loans also carry origination fees and other charges, so verify that your interest savings aren’t being consumed by fees – especially in the case of balance transfer credit card offers with introductory 0% APRs and/or no balance transfer fees.
Also, remember that loan consolidation is just a way to make existing debt more manageable. Don’t look at a personal loan with favorable terms as a means to free up more money for continued overspending.
On the flip side, personal loans can be helpful for budget planning purposes and payment discipline. You may be tempted to reduce payments on a credit card balance, but you have a set payment amount and timing with a personal loan.
Is a personal loan right for you, or are there better alternatives? Only you can decide, depending on your circumstances. Use an online calculator to help you compare long-term costs and monthly payments, take your income and overall budget into account, and you’re likely to make the right decision. If you are interested in a personal loan, visit our curated list of top lenders.
However, you should check your credit score and credit report to make sure your credit is being properly reported and is in good shape – because a great credit profile provides more favorable options regardless of your financial goal. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.