In this article, you'll learn how to use a personal loan to clear your credit cards, reduce the interest you pay overall, and clear your debts more quickly. You'll also discover the pitfalls to be aware of when consolidating debt.
Why use a loan to clear your credit cards?
With interest rates still at a very low level in the UK, you can find loans in the marketplace which cost a lot less to service than a typical credit or store card. At Neyber, for example, loans start from 3.9% representative APR, while the average UK credit card has an APR of 23%, according to Moneyfacts.
So if you've got expensive debts on a credit card that you don't clear every month, you could save money by shifting them to a cheaper loan.
You also have the advantage of making one fixed payment a month instead of juggling several, and some loans will even allow you to make overpayments without penalty. The loan will have a fixed term so you know when the debt will be cleared, ideal if you're only paying the minimum on your cards each month and the balance never goes down.
Ask whether your credit card companies will offer you a 0% balance transfer deal for a fixed period, and what the fees would be. If you already have an introductory period on any of your cards then you need to decide if you can clear the balance before the interest rate goes up. If not, a loan might be a better option so long as you can afford the monthly repayments.
Add up all your card balances to find out what size loan you would need to clear them. You can use a 'soft search' eligibility checker online to see whether you are likely to be accepted for a loan. This means the search will only be visible to you and the loan provider without impacting your credit score.
Remember, you might not get the best rate advertised, it will depend on your credit history.
How much could you save?
Let's look at an example. Say you've got two credit cards and a store card with balances totalling £10,000.
Card A has an APR of 18.9%, Card B 22.9% and Card C 24.9%. You're only paying the minimum payments on them every month.
At this rate, these debts will take nearly 30 years to clear and would cost you more than £16,000 just in interest. But if you took out a loan at a rate of 4.6%, and you paid off £228 a month, you'd clear the debt in four years and it would cost you £947 in interest.
A word of warning
When consolidating debts, you have to tread carefully or it can lead to more debt in the long run. Why? Because people don't address the causes of the overspending which led them to run up big credit card debts in the first place.
They fail to cancel the cards when they take out a loan, and soon run up balances on them again. Now they have a loan as well as the credit cards to deal with.
This can lead to a debt spiral, so it is vital that you have the discipline to cut up your cards when you transfer that debt to a loan. Remember there's no quick fix, and you can't borrow your way out of debt.
Why not check your statements to see the balances on your cards and how much they are costing you?
Then use an eligibility checker to see if you might be accepted for a loan at a lower APR than you are paying on your cards.
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