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If you weren't aware of this when you take on revolving debt – that balance transfer card – it could harm your credit score. But when you take out a personal loan that could actually improve your score. This is due to a thing called credit utilization which is the amount of credit you’ve used (utilized) vs. the total amount you have available. If you were to get a balance transfer card and transfer all of your credit card balances to it, your credit utilization ratio would go to nearly 100%, which would damage your score. However, if you take out a personal loan to consolidate your debt this could actually lower your utilization ratio to zero, which would improve your score.
Personal loans and balance transfers have several things in common. First, either would simplify your life because instead of having to make multiple payments a month at different due dates, you’d have only one payment to make and one due date a month. Second, you would save money because a personal loan will have a lower interest rate than the average of the interest rates you're currently paying and, of course, a 0% interest balance transfer card would have no interest charges at all. However, as you have read each has its own pros and cons. You will need to weigh them carefully and then choose the one you feel would be best for you.
There are other ways to manage debt beyond a personal loan or balance transfer. Watch the following video to learn what they are and how they could help.
Frequently asked questions about personal loans
Q. What is the best bank for a personal loan?
A. The best bank for a personal loan isn’t a bank. It’s an online lender. This is because online lenders like Lending Club, Peerform and Prosper can offer much lower interest rates than banks or thrifts because they eliminate the middleman – the money comes directly from lenders to you.
Q. Are there personal loans with no credit check?
A. Yes, it's possible to get a personal loan where there is no credit check. There are several online lenders that will not check your credit and that offer competitive interest rates but will have a fee. Also, most payday lenders don't require a credit check.
Q. Can I get a personal loan without collateral?
A. The answer to this is also yes. In fact, personal loans are always unsecured loans meaning that you wouldn’t have to use any asset as collateral. Mortgage loans and auto loans are examples of loans that do require collateral.
Q. Could I get a personal loan with a low credit score?
A. There are personal loans available online for people with low credit scores. However, the interest rates are probably going to be too high for them to make any sense when you're trying to pay off your debt and save money.
Q. Could I use a personal loan to pay off student loan debts?
A. Using a personal loan to pay off student loan debts is a very common practice. This can be an especially good option if you have high-interest, personal student loan debts or even high-interest federal student loan debts. Interest rates for personal loans are currently at almost all-time lows so now would be a really good time to consider a refi.
Q. How does a personal loan compare with a line of credit?
A. Personal loans are for a fixed term at a fixed amount. For example, you might get a personal loan for $3000 for three years with a fixed monthly payment of $275. Personal lines of credit also have a fixed amount but you access the money when you wish by using special checks or by requesting a transfer of funds to your checking account. These loans are also unsecured.