Are Personal Loans Really Cheaper than Credit Cards?
If you’re one of the many Americans buried under credit card debt, you may be wondering whether taking out a personal loan is the solution to your problem. There are pros and cons to almost every kind of loan that you can get, and personal loans can be a great option in many cases.
But a loan may not always be the better option for those facing monthly credit card payments. Each case is a bit different, so there’s no set answer that applies to everyone. But if you’re in a bind over your ever-expanding credit card balance, you may want to stop and think about your options.
Loans Over Plastic
Many consumers seem to believe that a loan will always be less costly than paying off their credit card bill in monthly installments. And for some, that truly is the case. That’s especially accurate if you’re saddled with a large balance on a high-interest card. Some credit cards have interest charges between 10 and 20 percent. That kind of interest can really add up over time. And that makes it tougher if you’re managing a big debt and are trying to pay off what they owe so that you can emerge with a clean slate.
Credit Card Debt Abounds
Many Americans are managing a credit card balance in recent times. The mean credit card debt of U.S. households is approximately $5,700, according to most recent data from the Survey of Consumer Finances by the U.S. Federal Reserve. On the flipside, many U.S. consumers are opting for personal loans. According to a recent Bankrate study, 24 million Americans (about 10% of the entire population) are very likely or somewhat likely to take out a personal loan in 2016.
A Kneejerk Reaction
Many of us assume that the personal loan will automatically be cheaper than paying off a credit card balance. But in some instances you may be able to get a competitive deal with plastic. Given the high competition among the credit card industry, you might be able to take advantage of offers for low-rate cards that are competitive with what lenders are offering in personal loans. Also, credit card lenders may offer other inducements, such as airline miles and points toward merchandise discounts. However, be aware that a number of factors go into deciding whether or not you can get a low interest loan or credit card.
History and Income
If your income, credit history and debt-to-income ratio are up to par, you can probably expect to get a personal loan that will be cheaper than the interest rate you’re paying on your card. In that case it would make a great deal of sense to take out the loan. Once you’ve got the cash in hand you can pay off your credit card balances and stop shelling out the higher monthly interest rates that your card requires.
Test Your Credit Worthiness
Before you decide to take one course of action or another, it’s important that you look at all of the factors and get a clear picture of where you stand financially. Look at these factors and then make a determination of how credit card interest stacks up against loan rates:
Top Tier
Anyone with a FICO score of 720 to 850 would almost never have to worry about being approved for a reasonable line of credit. That range of scores indicates that the borrower has an excellent credit history and would be welcomed with open arms by any bank, credit union or online lender.
In Good Territory
Still high up in the desirability range among loan customers are the ones who rate FICO score of 690 to 719. They have a good rating, and thus will be offered a wide range of loans to select from, although they will likely not get the super-low rates that those with excellent scores can command.
Middling Scores
Anyone whose score is in the 630 to 689 range, on average, can get a personal loan at a reasonable rate. However, the more income they can show, the lower they can expect their interest rates to be. But they may also get stuck with a loan origination fee as part of the bargain.
Poor Credit Still Works
Then there are those on the lower end of the credit score spectrum, who are in the 300 to 629 range. Although this is considered a bad credit score, they can still qualify for a personal loan, however it usually requires that they get a co-signer, put up certain assets to secure the loan or show that they’ve got a significant rate of income.
If you aren’t in line for a high-paying executive position, or haven’t struck the lottery, you’d probably be well advised to find a co-signer or put aside a few hundred dollars to deposit as collateral to back up your loan.
Take an Honest Look
Assess where you stand financially and check your credit score as well as your debt-to-income ratio and determine what kinds of loans you’ll be eligible for. You may find that you can get a better deal by taking out a personal loan and paying down your credit card balance. However, if the best loan rates you can find are no better or even higher than what your card company is charging, you’d be better off standing pat.
Perhaps in six months time, with a history of regular on-time payments on all of your debts you may be able to wrangle a loan that offers you a better deal than what you’re shelling out in your card payments. That’s when it’s time to make the move.
