How to use a personal loan to pay off your debt faster

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.

Debt consolidation is the process of taking on multiple debts – like credit card debts or multiple student loan debts – and “bundling” them into one debt with one monthly payment and one interest rate. You can also usually receive a lower interest rate when consolidating your debt, so this strategy also makes sense if you want to save on interest charges.

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.

SoFi personal loans, which is on our list of the best personal loans for consolidating debt, allows you to consolidate different types of debt, including student loan debt. Along with no prepayment penalty, this lender also doesn’t charge late fees or set-up fees, making 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.

If your credit score is closer to the average, you can still qualify for a Beginner 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.

And like SoFi, Marcus Personal Loans by Goldman Sachs does not charge late fees, origination 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.

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.

Catch up on Select’s in-depth coverage of personal finances, technology and tools, The well-being and more, and follow us on Facebook, Instagram and Twitter to stay up to date.