Whether you have credit card debt, student loan debt or lingering medical bills, taking out a low-interest personal loan to consolidate those debts might be a money-savings solution you should consider. The term “debt consolidation” has a negative connotation for many people, but the reality is that replacing multiple creditors with a single lender can often save you money and put you on a path to eliminating large amounts of debt.
A personal loan will not eliminate your debt, but it can make it more manageable, especially if you find a low-interest personal loan.
Using Low-Interest Personal Loans to Pay Off Debt
Consolidating credit card debt with a low-interest personal loan can save you significantly over the course of the life of a loan. For example, using Wells Fargo’s debt consolidation calculator, you can see that exchanging $10,000 of credit card debt that carries an annual percentage rate of 20% for a personal loan with a 7.75% APR and a four-year term will save you $4,953.04. This assumes you were paying $250 per month on your credit cards and a consolidated payment of $242.96. With the loan, you would also pay off this debt a year and a half faster.
Where to Find Low-Interest Personal Loans
One of the most effective ways to find such a loan is to research offers online. If you have an existing relationship with a bank or credit union, you should contact your representative, but casting a wider net is likely to give you the most flexibility.
“Deciding on a personal loan requires above all, comparison shopping and due diligence,” said Dan Blacharski, a spokesman for MoneyLend.net. “Even if your credit is marginal, there will still be options, so don’t take the first offer until you’ve taken time to see what else is available. Keep in mind that the neighborhood storefront loan shop isn’t always going to have the best deal and keep the higher-cost payday loan options only as a last resort.”
What Are Secured and Unsecured Personal Loans?
The difference between a secured and an unsecured personal loan is the collateral you put up to guarantee the loan to the lender. With an unsecured loan, you are asking for money based on the strength of your credit, and with a secured loan you are offering the lender something valuable to back up the loan. The interest rate of a secured loan is likely to be lower, but if you have trouble repaying the loan, you run the risk of having the collateral taken by the lender.
A “personal loan can be a great help in building a person’s credit history,” said Alex Gerard, founder of CardsMix.com, but unsecured loans are not always an option: “One of the important parts of the credit score equation is the mix of the credits you have. If your credit score is in low digits, consider getting a secured ‘credit builder’ type of personal loan. Combined with a credit card ,it can help you in establishing a credit and growing your score in one year.”
Ultimately, which type of loan will work for you comes down to your personal circumstances.
Preparing for the Personal Loan Application Process
While the documentation required to get a loan will differ from one lender to the next, there is some standard information that you should be prepared to provide. For example, most lenders will need your name, address and Social Security number; will need to verify your income and employer; and will want to understand your overall financial picture by seeing copies of bank statements. If you are applying for a secured loan, you should be prepared to provide documentation on the collateral. Having these documents ready will help you to streamline the process.
What to Expect When Applying for a Loan
When you are applying for a loan, you should expect to be asked for a lot of personal information and to give assurances that you are a good risk. It is a good idea to get a copy of your credit report in advance and be prepared to explain any negative items that might appear. Being prepared is one of your best tools.
Ultimately, finding and securing a low-interest personal loan is a good way to consolidate debt and save yourself money. With some homework, you can find one of these loans and improve your overall financial position.
This article originally appeared on GOBankingRates.com: How to Find Low-Interest Personal Loans to Pay Off Debt