Let’s take the following scenario as a starting point to pay credit card debts.Say you have the following Credit card debts: $5,000, $7,000 and $10,000. You are approved for a joint $22 K 36-month personal Loan with an interest rate of 14.99%.

So, you wonder if it’d be a wise move to take out a personal loan to pay credit card debts. 

Now, your main concern is related to the credit score – how it could be affected by this loan.

As with any issue, the first step should always be getting informed. If you find yourself in a similar position to the one outlined above, I suggest you start reading to find the best outcome.

What Are Unsecured Loans?

The personal loans mentioned above fall into the unsecured loans category.

This type of loan allows you to borrow money for almost any purpose.

“Unsecured” means there is no property or collateral to guarantee the loan is repaid.

It is the secured loans you have to pledge collateral for, in order to increase the chances of getting a good rate. The best example is mortgage loans, which are secured with property.

With unsecured loans however, you don’t have to stress over potentially losing your possessions.

While this means less risk for you, it also means the loaner has to take other guarantees.

This is why they:

• Charge larger interest rates than for a secured loan.
• Can take legal action.
• Can proceed to garnishing wages (this is the situation where an employer withholds an employee’s paycheck so as to direct it towards the institution/person the employee owes money to).

Types of Unsecured Loans

When you’re looking to take out a personal loan to pay credit card debts, you’ll stumble upon these types of unsecured loans:

• Signature Loans– Basically, you secure a loan only by signing it, which obviously poses less risk for you. These loans are best for those who have good credit because they come with a low interest rate. Signature loans consist of a “lump-sum” from the bank or credit union you choose. If you are eligible for this kind of loan, you make future financial actions less expensive in the long run.
• Credit Cards Loans– The difference between these and signature loans is that you don’t get all the money at once. Credit card loans are more convenient for a lot of users, as they enable you to borrow any sum any time or charge more on the card. Unfortunately, they come with downsides: Interest rates are higher and you may end up with loads of unplanned interest costs.
• Student Loans -They offer features unavailable with other loans: Flexible repayment or grace periods are just a few.
• Peer-to-Peer Loans -In case you don’t necessarily see banks as the best intermediary, there’s the possibility of peer-to-peer loans. These loans, like signature loans, are generally fixed-rate installment loans. Credit still plays a big part. Fixed-rate installments are also established quite like in the signature loan case.

What Does Bad Credit Mean?

Credit is any information about your borrowing history. To the lenders, credit is much like a visit card. It can be a great recommendation if you’ve been building credit actively.

Simply put, bad credit is a red flag for lenders when they want to grant you a loan.

They take notice if you:

• Have failed to repay loans
• Declared bankruptcy
• Regularly been late on payments
• Have errors on the credit report
• Maxed out your credit lines

To avoid bad credit, you have to work towards building the best credit score. A favorable credit score is achievable by having a good record with bills payment.

In terms of figures, you’ll want to get at least 720 on the FICO scale. My affiliate peer-to-peer lenders can secure a minimum score of 620, depending on your card history.

This score helps secure a lower interest rate as it tells lenders that you’re very likely to repay the lending.

To make sure you’re on the right track to a good credit score, asking yourself these three questions might help:

• Do I make payments on time?
• Have I got a lot of debt?
• Do I have a rich credit history?

P2P (Peer-to-Peer) Lending

Now let’s get back to the previously mentioned peer-to-peer loans, as they are getting popular within the US financial stage. 

P2P lending is a growing industry, as the aftermath of the 2008 financial crisis had banks tighten their lending policies.

Personal loans online platforms are a more accessible way to deal with credit card debt. Once you launch a request, loaners advance their offers.

“Online” is the key word here. Because these platforms are digital, they charge smaller fees than traditional banks or lending firms.

Just to give you a quantifiable idea, think of large lending platforms like Lending Club or Prosper. They finished 2015 with a market cap of $15 billion and $1.9 billion, respectively.

P2P also establishes an interest rate. It is assessed after submitting your credit score, income data or financial assets information. The loans are paid once a month, automatically from the borrower’s bank account.

P2P is a viable solution when getting rid of high-interest rate debt.

How to Decide If You Need to Take Out a Personal Loan to Pay Credit Card Debts

If borrowing is what helps your finances long-term, this is the step you should be taking.

If you remember the case described in the introduction of this article, it is an example of a situation where a personal loan would come in handy – on condition that the borrowers are sure they can provide all the monthly payments.

In this particular case, the multiple credit card dues make it difficult for the borrowers to balance their card. It’s easier for them to pay one fixed monthly rate for the personal loan, than several rates for each of their CC (Credit Card) dues.

This way, they minimize the peril of missed payments.

On top of that, they will be able to prioritize their expenses and get a stronger motivation while feeling less overwhelmed.

To avoid getting into a debt spiral, the best way is to contact a financial adviser or a professional agent before you apply for a personal loan to pay credit card debts.

My experience and expertise are at your disposal if you decide to get in touch. Plus, my P2P affiliates also offer:

• Loans ranging from $1,000 to $35,000
• 6% to 36% APR (Annual Percentage Rate)
• Unsecured personal loans
• Debt consolidation loans

We offer these services to all eligible customers who:

• Are US residents
• Have a minimum credit score of 580
• Are at least 18 years old
• Are employed or self-employed
• Dispose of a regular source of income

If this is something that would interest you, be sure to get in touch with me.