Don’t make debt repayment more difficult than necessary by missing an opportunity to save money.
- Personal loans can allow you to lower the interest rate on your debt.
- You can avoid having to choose which debts to pay off first.
- You may be able to get out of debt faster and for less money by using a personal loan to help pay off your debts.
Paying off a debt can take a long time and require a lot of financial sacrifice. But there may be a way to make paying off debt both cheaper and easier. In many cases, taking out a personal loan to refinance and consolidate your debt could be the way to lower your costs and simplify the repayment process.
Here’s how to cut debt repayment costs with a personal loan
Personal loans can help lower the total cost of paying off your debt if you are able to borrow money at an affordable interest rate and use the loan proceeds to pay off other creditors.
If you can qualify for a personal loan with a lower rate than your current debt, refinancing with that personal loan is often a smart move. The lower the interest rate you pay, the less your creditor takes from your payment each month, even if you don’t reduce your principal balance. With more of your money devoted to principal, your balance drops faster, even without making larger payments.
Refinancing with a personal loan can also allow you to merge multiple debts, giving you one lender to pay instead of many. This eliminates a situation where you have to decide which loans to prioritize paying extra money each month. Many people use a snowball method of paying off their loans, which involves paying off small debts first in order to stay motivated, even if those debts are at higher rates. While there are psychological benefits to this strategy, it may mean paying off debt is more expensive down the road.
If you’ve refinanced several existing debts into a personal loan, you won’t have to choose the order in which to pay them off – and it could cost you money if you choose the snowball approach. Instead, your single monthly payment will simply serve to reduce your total debt balance since all of your existing loans will be combined into one.
Will this approach work for you?
Debt refinancing using a personal loan can undoubtedly help you save money in most situations, but not in all situation. This technique may not work for you if:
- You cannot qualify for a new personal loan at an interest rate lower than your current rate. If you were to raise your rates, you would make borrowing more expensive, and this approach would eventually backfire.
- You are living beyond your means. If you use a personal loan to pay off other debts, such as credit cards, there is a risk that you will regain your card balance after you release your line of credit. This could leave you with double the debt, since you will have your personal loans and your new balance on your card to pay. Therefore, you don’t want to refinance until you’re sure you can do it responsibly and live with a budget that controls your spending.
- You plan to refinance a loan with a much longer repayment time. If you extend the repayment period of your current loans, it could become more expensive to pay them back, because you will be paying interest for longer. Paying interest for months or years longer could increase borrowing costs, even if your new loan lowers the rate on your current debt.
Outside of these situations, a personal loan is often a great tool for reducing debt repayment costs. It’s worth considering whether this strategy might work for you.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.