How to Use a Personal Loan to Pay Off Your Debt Faster

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Paying off debt can be both expensive and exhausting, especially when you have multiple debts to settle each month. And with the added stress of interest rates that are higher than you would like, you might feel never be debt free.

There are many popular debt repayment strategies, such as the snowball method or the avalanche method. But another common tactic for getting out of debt a little faster is debt consolidation – and using a personal loan to do this makes the process as painless as possible.

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What is debt consolidation?

How does debt consolidation work?

One way to consolidate multiple debts is to use a personal loan. When you apply for a personal loan, you request a lump sum of money which is usually deposited in your bank account so that you can use it when needed.

When you use a personal loan for debt consolidation, however, the lender can make a direct payment to the lenders who hold your other debts. Then you will only be responsible for repaying the new personal loan at a fixed monthly payment and a new interest rate.

Often, this interest rate is lower than the rates you pay on your other debts. A lower interest rate means you’ll spend less money on payments over the life of the loan. And, you can actually pay off the loan faster because it can give you more room to invest some extra capital money.

Of course, however, the interest rate you receive will depend on your creditworthiness. In other words, a higher credit score can get you a lower interest rate, and a poor credit score can leave you with an interest rate at the higher end of the range of one. lender.

And since you’re essentially “replacing” your multiple debts with a new loan when you consolidate, you’ll only have to worry about making one monthly payment, instead of just slowly chipping away at various debts. If the personal loan you used to consolidate debts does not have a prepayment penalty (i.e. prepayment charge), you might consider taking the same amount of money you would have paid for all your debts and throwing it all at the staff. loan payment. This can help you pay off the loan even faster (and save even more on interest charges).

Again, though, the key here is to look for personal lenders that don’t charge a prepayment penalty. These are additional fees charged by some lenders if you repay your loan early. The actual cost of a prepayment penalty will vary depending on how it is charged. It can be charged as a percentage of your loan balance, as a fixed fee, or as the amount of interest a lender would miss since you prepaid the loan. Therefore, a prepayment penalty could cost you dearly.

Debt consolidation loans with no prepayment penalty

SoFi Personal Loans, which is on our list of the best personal loans to consolidate debt, allows you to consolidate different types of debt, including student loans. In addition to no prepayment penalty, this lender also does not charge late fees or set-up fees, which makes it a bit more affordable to use compared to lenders who charge these fees. Keep in mind, however, that you will generally need a good or excellent credit score to qualify.

SoFi Personal Loans

  • Annual Percentage Rate (APR)

    5.99% to 18.85% when you sign up for autopay

  • Purpose of the loan

    Debt consolidation/refinance, home improvement, relocation assistance or medical expenses

  • Loan amounts

  • terms

  • Credit needed

  • Assembly costs

  • Prepayment penalty

  • Late charge

Advantages

  • No set-up fees, no prepayment fees, no late fees
  • Unemployment protection if you lose your job
  • DACA recipients can apply with a creditworthy co-borrower who is a U.S. citizen/permanent resident by calling 877-936-2269
  • Can have more than one SoFi loan at a time (permitted by state)
  • Can accept a job offer (starting within the next 90 days) as proof of income
  • Co-applicants can apply

The inconvenients

  • U.S. visa applicants must have more than two years remaining on the visa to be eligible
  • No co-signers allowed (co-applicants only)

If your credit score is closer to average, you may still qualify for a Personal loan for beginners. Upstart generally requires a FICO score of 600, but the lender still accepts applicants with poor credit history. It can be used for debt consolidation and there are no prepayment fees, however, there are origination fees – it will cost you from 0% to 8% of the loan amount. There is also a late fee, which would be 5% of the amount owed or $15, whichever is greater.

Beginner personal loans

  • Annual Percentage Rate (APR)

  • Purpose of the loan

    Debt consolidation, credit card refinance, home renovation, wedding, moving or medical

  • Loan amounts

  • terms

  • Credit needed

    FICO or Vantage score of 600 (but will accept applicants whose credit history is so poor that they have no credit score)

  • Assembly costs

    0% to 8% of target amount

  • Prepayment penalty

  • Late charge

    Greater of 5% of monthly amount past due or $15

Advantages

  • Open to borrowers with fair credit (minimum 600 score)
  • Will accept applicants who have poor credit history and no credit score
  • No prepayment charges
  • 99% of personal loan funds are sent the next business day after completing the required documents before 5 p.m. Monday to Friday

The inconvenients

  • High late fees
  • Origination fee of 0% to 8% of the target amount (automatically withheld from the loan before it is issued to you)
  • $10 fee to request hard copies of the loan agreement (no fee for virtual copies signed online)
  • Must have a social security number

And like SoFi, Marcus by Goldman Sachs Personal Loans does not charge late fees, set-up fees or prepayment fees. This lender will send payments directly to up to 10 creditors so you don’t have to worry about doing the heavy lifting.

Marcus by Goldman Sachs Personal Loans

  • Annual Percentage Rate (APR)

    6.99% to 19.99% APR when you sign up for autopay

  • Purpose of the loan

    Debt consolidation, home improvement, wedding, moving and moving or vacation

  • Loan amounts

  • terms

  • Credit needed

  • Assembly costs

  • Prepayment penalty

  • Late charge

Advantages

  • No set-up fees, no prepayment fees, no late fees
  • Will send direct payment to up to 10 creditors (for debt consolidation)
  • VantageScore Monthly Updates
  • Earn a month’s payment holiday (interest free) after making 12 consecutive payments on time
  • Ability to choose your due date when you accept the loan (and up to two more times thereafter)

The inconvenients

  • Does not accept joint applications and/or co-signers
  • Not the fastest funding (may take a week or 10 business days)
  • Slightly stricter approval requirements (especially for larger/lower interest loans)

At the end of the line

Debt consolidation can be a handy strategy for paying off multiple debts as quickly (and cheaply) as possible. This may be especially true if the personal loan you’re using to consolidate your debt doesn’t charge you a penalty for prepaying the balance. But most importantly, you should always make sure that personal loans match your personal needs before you sign up for one.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.

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