Using Installment Loan to Pay Credit Card: How Does It Work?
Consolidating all your credit card debt into a single installment loan would almost certainly save you money, but it will almost certainly result in higher monthly payments.
It's pretty simple to get oneself into credit card debt: put more money on the cards than you currently have and keep doing so until you're maxed out. On the other hand, getting rid of credit card debt is a little more complicated. You have a lot of options, but none of them are simple.
Consolidating all of your credit cards into a single debt—such as with a personal installment loan—is one option for paying off your debt. You utilize that loan to pay off all of your credit cards, leaving you with just one simple monthly payment. Is this the most appropriate method for you? Continue reading to find out.
How Do Installment Loans Work?
When you get a personal loan, it's almost always in the form of an installment loan. This implies you'll make a series of fixed, monthly installments to repay the debt. You'll take out a single lump sum loan that you'll have to repay with interest.
Your credit score will determine your personal loan's interest rate. The higher your credit score, the more creditworthy you are to a potential lender and the lower the interest rate you will be charged. The lower your score, the riskier you appear to be, and the more interest you'll have to pay to make up for it.
Installment loans accumulate interest over time. The longer a loan is outstanding, the higher the interest rate. However, because the interest will be calculated on the remaining principal, the amount of money you will earn in interest will decrease over time.
Finally, installment loans are amortizing, which means that each payment is applied to both the principal and interest owed. The loan's amortization plan sets the amount that goes toward each, but you can rest assured that every payment you make on-time will get you closer to being debt-free.
Why Use Installment Loans to Pay Off Credit Cards?
There are several compelling arguments for taking out a loan to pay off credit cards:
1. Lowering Your Interest Rate Could Help You Save Money
You may be able to save money on interest while repaying your debt if you can get approved for a loan with a lower interest rate than your credit card.
2. There Will Be a Set Payment Schedule for You
If you merely make minimum payments or keep using your credit card, you may find it challenging to pay off your debt. You'll know exactly how much you'll pay each month and how long it'll take to pay off the debt with a fixed-rate installment loan.
3. Your Credit Score May Improve
The quantity of revolving debt you have compared to your credit limits on revolving accounts (such as credit cards and lines of credit) is a crucial credit-scoring criterion. The amount of installment loan debt you have is also considered, although it isn't as critical. Your credit ratings may improve if you use an installment loan to pay off a revolving account while keeping the account open.
What are the Risks of Taking Out a Loan to Pay Off Credit Cards?
While conserving money, staying to a plan, and boosting your credit score are all excellent outcomes, there is a drawback. People who have trouble regulating their credit card spending and continue to use the card may find themselves deep in credit card debt once more, on top of having to pay back their new loan.
If this is a problem, it may be best to close the credit card once paid off. While this may offset some of the benefits of having a good credit score, it may benefit your overall budget.
Should You Go for It?
Consolidating your credit cards into a personal installment loan is a reasonable debt repayment option, mainly if your credit score is good.
At Opelika Finance, we have a wide range of personal loan sizes to meet your specialized requirements. We will analyze our many alternatives and, if approved, place you on a reasonable payment plan for installment loans in Opelika, AL. Call 334-745-2600 to get started!