The Payoff Series: Personal Loans & Refinancing

payoff series

The Payoff Series: Personal Loans & Refinancing

Last week, I told y’all about a 6-part series I’m doing on personal loans, credit card debt, and refinancing – the Payoff Series. Welcome to Part I!


It’s no secret that America is in a debt crisis – student loan debt is in the trillions, the government itself is battling its own debt, and regular consumers are adding mortgages and credit cards to the mix. The average American household has $15,000 in credit card debt, and the average interest rate on those credit cards remains above 13%.

Debt Stress is No Joke

And how are people handling all that debt? Not well. One in five people consider money a taboo subject, according to a recent Harris poll. It’s also the No. 1 cause of stress, according to the survey, ahead of work, family and health concerns. 23% of Americans — and 36% of Millennials — experience a debilitating degree of stress surrounding their finances.  So unless you’re expecting a windfall from a long-lost relative (which is pretty depressing), it’s up to you to come up with a game plan to manage your finances.

The obvious solution is to hurry up and pay off the debt, but in the meantime, there’s another way to save money, an especially helpful one if you are in the “post-grad plateau,” at the early stage of your career with higher income potential just around the corner. With the average annual percentage rate (APR) for fixed-rate credit cards around 12.5% and variable-rate credit cards closer to 16%, you could save thousands of dollars by refinancing credit card debt with a low interest personal loan.

The Cost of Paying Off $15,000 Over Three Years

Need the hard numbers? Here’s an example:

Let’s say you have a $15,000 balance on a fixed rate credit card with a 15% APR, and your goal is to pay it off within three years. Your monthly payment would be about $520, while your total interest cost would be about $3,700 – and that’s if you don’t continue to charge new credit card debt.

Now let’s say you qualify for a 7.5% APR personal loan with a 3-year term, and use it to refinance your credit card debt – your monthly payment would go down by $53 and you’d save almost $2,000 on total interest over the life of the loan.

I’ll be doing a case study on my own personal loan/credit card debt scenario with Payoff a little later on in the Payoff Series, but this example speaks volumes. It also comes with a pretty graphic.

Blog-Article-Refi-Credit-Card
Graph courtesy of SoFi Loans

 Personal Loans aren’t Free

All that being said, you do need to be careful.

  • First, most lenders charge an origination fee, which will not be reimbursed if you pay off your loan early. Although there are no prepayment penalties, the origination fee is a kind of prepayment penalty in disguise – in other words, make sure it’s low.
  • Second, when you use a personal loan to pay off credit card debt, you are making it easy to spend money on those credit cards once again. If you weren’t able to handle your spending before, you might end up spending on your credit cards once again. Have a plan in place to nix any future debt so that you’re actually making progress on getting rid of the credit cards once and for all.
  • Third, you’re credit score will play a part in how low that new interest rate will be. Check your options before agreeing to anything to make sure that you’re really saving money by using a personal loan. A credit score of less than 600 will make it difficult for you to qualify for a personal loan. You’ll need to get debt-free the hard way.

Refinancing high interest rate credit cards can be a great deal. Just make sure you consider the origination fee, and cut up those credit cards after paying them off if you don’t trust yourself with plastic.

-ECD

Tell me, have you ever used a personal loan to pay off another debt? What other options have you looked into to pay off credit card debt?


Next time on the Payoff Series, I’ll be discussing exactly how to go out and find that credit card debt/personal savior of a personal loan…and more tips on what to look out for and how to get the most out of your personal loan.

4 Comments

  1. I’ll be honest, I have not used a personal loan to pay off a credit card debt. But I never really got into credit card debt. We’ve been paying off the balance every month for 20 years.

    My one suggestion if someone goes down this path is to destroy the credit cards after they pay them off. As you said, the temptation might be too great – out of site, out of mind.

    1. Author

      Exactly! I kept mine (in case I really do need it for an emergency of some kind), but it’s locked in a box that is extraordinarily inconvenient to get to. I did a 2-month trial run of no card usage before allowing myself to get the personal loan. I’d also advise people to delete any saved card information on websites, like Amazon, too.

  2. Payoff charged me something crazy like an $800 origination fee! That said, I really liked their customer service and ease of the process. I ended up paying them off and opening another loan with a lower interest rate and no origination fee through the National Education Association.

    1. Author

      Yes, the customer service is awesome! Well done getting the lower rate and no fee, that’s awesome!

Comments are closed.