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 accumulate each month. And with the added stress of interest rates that are higher than you’d like, you can feel like you’re going never be debt free.

There are many popular debt repayment strategies, such as the snowball method or the avalanche method. But another common tactic to get off debt a little faster is debt consolidation – and using a personal loan to do so 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 are asking for a lump sum which is usually deposited into your bank account so that you can use it as needed.

However, when you use a personal loan for debt consolidation, 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 at a new interest rate.

Often times, this interest rate is lower than the rates you paid 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 put some extra cash on the principal.

Of course, the interest rate you receive will depend on your creditworthiness. In other words, a higher credit score can lower your interest rate, and a bad credit score can leave you with an interest rate in the upper end of a lender’s range.

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

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

Debt Consolidation Loans Without Prepayment Penalty

SoFi personal loans

  • Annual percentage rate (APR)

    5.99% to 18.85% when you sign up for automatic payment

  • Purpose of the loan

    Debt consolidation / refinancing, home renovation, moving assistance or medical expenses

  • Loan amounts

  • terms

  • Credit needed

  • Original fees

  • Prepayment penalty

  • Late charge

Advantages

  • No origination fees, no prepayment fees, no late fees
  • Unemployment protection if you lose your job
  • DACA grantees 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 (state permitted)
  • Can accept a job offer (to start within the next 90 days) as proof of income
  • Co-applicants can apply

The inconvenients

  • Applicants who hold a US visa must have more than two years remaining on the visa to be eligible
  • No authorized co-signer (co-applicants only)

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

Pushy personal loans

  • Annual percentage rate (APR)

  • Purpose of the loan

    Debt consolidation, credit card refinancing, home improvement, marriage, moving or medical

  • Loan amounts

  • terms

  • Credit needed

    FICO or Vantage score of 600 (but will accept applicants with such poor credit history that they do not have a credit score)

  • Original fees

    0% to 8% of the target amount

  • Prepayment penalty

  • Late charge

    The greater of 5% of the monthly overdue amount or $ 15

Advantages

  • Open to borrowers with fair credit (minimum score 600)
  • Will accept applicants who have an insufficient credit history and do not have a credit score
  • No prepayment charges
  • 99% of personal loan funds are sent the next business day after completing the required paperwork before 5 p.m. Monday to Friday

The inconvenients

  • High late fees
  • Origination fees from 0% to 8% of the target amount (automatically deducted from the loan before it is delivered to you)
  • $ 10 fee to request hard copies of the loan agreement (no fee for electronically signed virtual copies)
  • 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. This lender will send payments directly to up to 10 creditors so you don’t have to worry about doing the heavy lifting.

Marcus Personal Loans by Goldman Sachs

  • Annual percentage rate (APR)

    APR from 6.99% to 19.99% when you sign up for automatic payment

  • Purpose of the loan

    Debt Consolidation, Home Renovation, Marriage, Moving & Relocation or Vacation

  • Loan amounts

  • terms

  • Credit needed

  • Original fees

  • Prepayment penalty

  • Late charge

Advantages

  • No origination 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 of paid time off (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 financing (may take a week or 10 business days)
  • Slightly stricter approval requirements (especially for larger loans / lower interest rates)

At the end of the line

Debt consolidation can be a practical strategy to pay off multiple debts as quickly (and as affordably) as possible. This can be especially true if the personal loan you use to consolidate your debt doesn’t charge you a penalty for prepaying the balance. But more importantly, you should always make sure that the personal loans match your personal needs before signing up.

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Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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