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Debt-Free Strategy:

Personal Loans

Part 1

If your credit score is not high enough to qualify for a quality balance transfer card, or if the idea of opening another card is unappealing to you, there is another option.  A personal loan is a bare-bones way to borrow money, and while they might not offer interest rates as low as some promotional balance transfers, their rates are typically much lower than the standard credit card APR.  


First, you will want to look into the personal loan options offered by your bank or credit union.  You can also access countless lenders online, and fill out a soft application (meaning it will not show up on your credit report) to learn what rates they will offer you.  You will generally want to apply to and compare 3 to 5 different lenders to determine who is willing to give you the best deal.  But remember that it’s only a deal if they are willing to offer you a better rate than your current credit cards.  


When comparing personal loan offers, there are three numbers to pay close attention to: the interest rate, the origination fee, and the APR.  The interest rate is pretty straight forward.  The origination fee is a one time fee applied at the start of the loan, which may be refunded if you pay it off according to the lender’s schedule.  The APR is a conglomeration of these two figures, which gives you an overhead view of the loan’s rates.  You should try and keep track of all these numbers separately, but the APR can be a quick reference when comparing these loans.


Once you have selected and been officially approved (you will need to fill out a more in-depth application after the initial soft inquiry) for a person loan, you will use this money to pay off your credit cards.  Now, you will just be paying down the loan, and therefore collecting less interest.


Remember how we said that the origination fee MIGHT get refunded?  Oftentimes personal lenders will penalize you for paying off a loan early by not refunding this fee.  Essentially, they’re using it to make up for the interest they lost by you paying the loan off early.  So if you find yourself in a position where you are able to pay off the loan early, it’s a good idea to sit down, break out the calculator, and figure out whether it will cost you more to pay this fee or pay the additional interest.


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