Paying off debt can take a long time and require a lot of financial sacrifice. But there may be a way to make debt repayment both cheaper and easier. In many cases, taking out a personal loan to refinance and consolidate your debt could be just the ticket to lowering your costs and simplifying the repayment process.
Here’s how to reduce debt payoff costs with a personal loan
Personal loans can help you reduce the total costs of repaying your debt if you are able to borrow money at an affordable interest rate and use the loan proceeds to pay off other creditors.
If you can qualify for a personal loan that has a lower rate than your current debt, refinancing with that personal loan is often a smart move. The lower the interest rate you pay, the less your creditor takes each month from your payment, even though you’re not reducing your principal balance. With more of your money going toward principal, your balance falls faster even without making larger payments.
Refinancing using a personal loan can also allow you to merge multiple debts, giving you just one lender to pay instead of many. This eliminates a situation where you have to decide which loans to prioritize paying extra money to each month. Many people use a debt snowball method of paying back loans, which involves repaying smaller debts first in order to stay motivated, even if those debts are at higher rates. While there are psychological benefits to this strategy, it can mean debt payoff costs more in the end.
If you’ve refinanced multiple existing debts into a personal loan, you won’t have to make the choice about what order to pay them off in — and potentially cost yourself money if you choose the snowball approach. Instead, your one monthly payment will simply go toward reducing your total debt balance since all of your existing loans will be combined into one.
Will this approach work for you?
Refinancing debt using a personal loan can undoubtedly help you save in most situations, but that’s not the case in every situation. This technique may not work for you if:
- You can’t qualify for a new personal loan at a lower interest rate than your existing rate. If you would have to raise your rates, you’d be making borrowing more expensive, and this approach would end up backfiring on you.
- You’re living outside of your means. If you use a personal loan to repay other debt, such as credit cards, there’s a risk you’ll run up the balance on your card’s again after you’ve freed up your credit line. This could leave you with double the debt, since you’ll have your personal loans and your new balance on your card to pay. As a result, you don’t want to refinance until you’re confident you can do it responsibly and live on a budget that keeps your spending in check.
- You’re thinking of refinancing to a loan with a much longer payoff time. If you extend the time to repay your current loans, then paying them off could become costlier because you’ll pay interest for a longer time. Paying interest for months or years longer could raise borrowing costs, even if your new loan does reduce the rate on your current debt.
Outside of these situations, a personal loan is often a great tool to reduce debt payoff costs It’s worth looking into whether this strategy could work for you.
The Ascent’s Best Personal Loans for 2022
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent’s top picks.