Loans to Pay Off Debt

Yes, there are several ways that you may access the funds needed to clear your debts. The first thing you need to do is take an inventory of all your debts that you wish to consolidate, total up the amounts, and separate them into categories based on the credit account type. The main reason for this is that the type of loan that you want to take to clear your debts entirely depends on how much you are looking to consolidate and what kind of debt it is.

For example, if you have a good or excellent credit score and all of the debt you would like to consolidate is credit card debt, then you may want to explore taking out a new credit card. Credit card companies can offer credit cards with 0% introductory APRs for various terms such as 12, 18, or even 24-months. If you have a good credit history, you may be able to easily qualify for one of these credit cards and simply transfer all of the balances from your other credit cards onto the new card with the 0% APR. Once all the balances are transferred, you can then use the promotional period to pay down as much of that credit card balance as you can before you need to start paying interest on it.

Two main things to consider if you decide to go this route. First, you may have to pay a small balance transfer fee in order for your new credit card company to allow the transfers. Second, you may want to make sure that the new credit card company is willing to give you the credit limit you need to cover all of your existing credit card debt.

If you have less than perfect credit or need a longer term than an introductory credit card offer, a personal loan may be the best solution for debt consolidation. Some lenders may even offer direct payment to creditors to make debt consolidation seamless. If you choose to use a personal loan for debt consolidation then you should determine which accounts you want to combine. Next you will want to shop for personal loan offers to choose the right lender. Personal loans may also be called debt consolidation loans. The amount of debt you need to consolidate may impact the type of loan that is best for you.

Below we will explore a few options available for debt consolidation:

Home equity loan or home equity line of credit: There are many advantages and disadvantages to using a home equity loan or a HELOC to help you with debt consolidation. Some of the advantages of home equity loans and HELOCs include the fact that they often come with lower interest rates than other types of financing, there may be lower credit score requirements, and the longer repayment periods make monthly payments more affordable, spending on how much you borrow. The main disadvantages of home equity loans and HELOCs include the fact that you need at least 20% equity in your home to qualify, you most likely will need to pay for a home appraisal, the process can take much longer than other types of financing, and if you should happen to default on the loan, you may be in jeopardy of losing your home. This is because both home equity loans and HELOCs use your home as collateral to secure the loan. So what are the main differences between a home equity loan and a HELOC?

Home equity loan: A home equity loan allows homeowners to borrow against the equity of their home. equity is basically the difference between the home's fair market value and the current balance of the primary mortgage. For example, if you have a home that is worth $400,000 and a current mortgage balance of $200,000, then you would have $200,000 of equity in your home. Depending on the lender, you may be able to take out a loan for up to 80% or 90% of the equity in your home. For our example above, that would mean you would be able to take out a fixed-rate home equity loan for an amount between $160,000 and $180,000. To be clear, you do not need to take the maximum loan amount but instead, you can borrow any amount up to those amounts. These fixed-rate loans come in one large lump sum payment that you can use to pay off all of your debts and then pay it back with monthly payments plus interest. Common home equity loan terms come in 5-year fixed, 10-year fixed, and 15-year fixed-rate loans. Some lenders may offer longer loan terms, however, these are the most common.

Home equity line of credit (HELOC): HELOCs also borrow against a homeowner's equity, however, instead of one large upfront payment, a HELOC acts as a revolving line of credit that you can borrow against for a predetermined draw period. Essentially, a lender will set a credit limit and you are allowed to borrow as little or as much of that credit limit as you would like during the draw period. When the draw period ends, you and the lender may agree to renew the HELOC or to close it. Typical HELOCs have a draw period of 10-years followed by a 20-year repayment period. When you first open a home equity line of credit, you can either agree to make normal monthly payments on the amount you are borrowing or you can only pay the interest. If you decide to only pay the interest, you can have a very low monthly payment during the 10-year draw period, but once the 20-year repayment period kicks in, you may find that your monthly payments increase dramatically to make up for the smaller payments made during the draw period.

Both home equity loans and HELOCs come with many additional fees that other types of financing do not. Here is just a sample of some of the additional fees you may be required to pay if you decide to take out a home equity loan or open a home equity line of credit.

Appraisal fees

Application fees

Attorney fees

Title search fees

Mortgage preparation and filing fees

Annual fees

Transaction fees

401(k) loan: 401k loans can be a risky loan option, however, if done correctly, they bring many upsides to the table. For example, typically you can take out a 401k loan for up to 5-years with no impact on your credit score. The loan will never be reported to any of the credit bureaus. Additionally, interest rates can be much lower than traditional debt consolidation loans, and most often, any interest that is paid on the loan goes back to your 401k account. Essentially, you are paying yourself for the loan. Although these advantages may make a 401k loan quite appealing, there are many disadvantages to a 401k loan as well as some reasons why you should only use a 401k loan as a last resort. First, during the time that you have removed from your 401k retirement account, that money is no longer earning compound interest on your investments. Depending on the performance of the markets, you could significantly impact your retirement savings by missing out on large earning opportunities. Second, if you are unable to repay the loan for any reason, then you may be subject to early withdrawal penalties and tax implications as the amount owed may need to be added to your reported income for that tax year. Last, if your 401k plan is an employer-sponsored plan, if you lose or leave your job, you may have to pay back your loan in full. For these reasons, it is recommended that a 401k loan is not your first option.

Debt management plan: Debt management plans are typically a service that a nonprofit credit counseling agency may offer. Debt management plans consolidate several debts into one monthly payment at a reduced interest rate. Typically, these credit counseling agencies and debt management plans are available to consumers who are struggling to pay off their debts but they do not qualify for other options. Debt management plans come with fixed monthly payments, lower interest rates, and they do not hurt your credit score. However, in order to enroll in one of these plans, the credit counseling agency may require start-up fees, monthly fees, and on average, it can take between three and five years to pay off your debt.

Debt consolidation loans: Debt consolidation loans are a type of personal loan with fixed interest rates and monthly payments that provides one large upfront payment for you to pay each of your creditors. Some lenders may offer to send the funds from a debt consolidation loan directly to your creditors on your behalf, and some lenders may even give you a small rate discount for requesting this service. Any remaining funds once the creditors have been paid in full then can be deposited into an account of your choice. Some of the advantages of a debt consolidation loan include direct payment to creditors, lower APRS for excellent credit, and fixed monthly payments. Some of the main disadvantages of debt consolidation loans include higher interest rates for bad credit borrowers and the possibility of needing to pay other fees like an origination fee, late fees, and/or an early pay-off penalty. However, interest rates and fees are mainly determined by your credit score and the lender you are working with.

The act of getting a new loan to pay off debt is called debt consolidation. Debt consolidation is taking out a loan with the intention of using it to pay off multiple debts across various credit accounts and substituting multiple monthly payments with various interest rates for one monthly payment with a more favorable interest rate and/or monthly payment. A debt consolidation loan is a smart way to organize your finances and to make some real progress in paying down your debts and rebuilding your credit score.

In the long run, most often payoff loans do not hurt credit but instead, they help to improve credit scores. However, in the short term, anytime you take on a new line of credit, you are most likely going to see a slight drop in your credit score. The reasons for that drop include a new hard inquiry on your credit report and an increase in your overall debt. Any time a lender or credit card company processes an application for a new line of credit, a hard-inquiry credit check may be done to review your entire credit history in detail before approving or denying your request. This is different from a soft-pull credit check which many lenders use to prequalify a potential borrower for a new line of credit. Soft-pull credit checks have no impact on your credit at all. The second way that your credit score may decrease is because of the increase in your overall debt.

However, if you get a debt consolidation loan for the exact amount of your existing debt, then you may not see a dip in your credit score. But, if you take on a debt consolidation loan to pay off all of your existing debts and you ask for a little more to cover a purchase or to fund a potential small project, then you could see a decrease in your credit score. That being said, as you begin to make the monthly payments, you will be paying down your overall debt and building a better payment history. Overall debt and payment history account for about 65% of your credit score. Therefore, any progress in these two areas can have a dramatic effect on your credit score.

Yes, using one loan to pay off another can be done as a form of refinancing. Some lenders even specialize in refinancing current personal loans. Why would you want to use one loan to pay off another? One scenario that may demonstrate how paying off one loan with another could be beneficial is if you took out a personal loan sometime before when you have a much lower credit score and you are currently locked in with a higher APR. If you can qualify for a new personal loan with a much lower interest rate, then it may save you money to trade one loan for another.

There are many reasons that you may benefit from getting a debt consolidation loan to pay off existing debt. First, a debt consolidation loan, even if it does not save you a ton of money in the end, it can simplify your finances. Having multiple monthly payments with different due dates and different APRs spread across multiple credit accounts can get confusing and overwhelming.

A debt consolidation loan allows you to combine all those different monthly payments into one simple monthly payment with hopefully a more favorable interest rate and terms. Second, a debt consolidation loan can save you money by paying off high-interest debt like credit cards or high-interest loans and replacing it with a lower interest debt.

Lastly, a new debt consolidation loan allows you to create your ideal monthly payment depending on how long of a loan repayment period you and the lender agree upon. If you are looking for a lower monthly payment, having a debt consolidation loan that is spread out over several years can free up some money in your monthly budget that could be applied to a retirement account or savings. Or, if you have recently got a promotion or a significant raise, you can opt for a shorter loan repayment period with higher monthly payments to pay less in interest and to pay off the debt sooner.

Before you take on a debt consolidation loan, you should review the terms of the loan to ensure you are not going to be subject to high fees that may make the loan more expensive than you think.

There are several loan options that can be used to pay off debt. The first and most obvious option is to apply for and obtain a personal debt consolidation loan. To get a debt consolidation loan you should identify the accounts you want to consolidate. Then you should total their balances to determine how much you'll need to borrow. Next, you'll want to compare debt consolidation loan offers. It's important to make sure the debt consolidation loan has lower loan costs than your existing lines of credit. If a debt consolidation loan makes financial sense and you can afford the monthly payment, you will want to complete the approval process with the lender. Some lenders may offer direct payment to creditors to make consolidating debt that much easier. At Acorn Finance you can shop debt consolidation loan offers from top national lenders without impacting your credit score.

If you are looking for a loan to pay off your debt and you do not want to take on a personal debt consolidation loan, there are still a few other options you may want to consider. If you have at least 20% equity built up into your home and you do not already have a 2nd mortgage, you may want to consider a home equity loan or a home equity line of credit to pay down your debt. Often home equity loans and HELOCs come with lower interest rates than personal debt consolidation loans. Also, it may be easier to qualify for a home equity loan than a debt consolidation loan if you have bad credit. The main reason for this is that you are going to be using your home as collateral to secure the loan. If for any reason you are unable to pay your loan and you default, you may risk losing your home when the lender sells your home to repay your debt.

If you only have credit card debt that you are looking to consolidate, then you can always consider applying for a new credit card and transferring all the old credit card balances to the new credit card. If you have good or excellent credit, you may be able to qualify for a new credit card with a 0% APR promotional period. You may have to pay some balance transfer fees in the process, however, you could potentially save a lot of money in interest payments if you are able to pay off the entire balance before the promotional period ends.

While you can't use a traditional mortgage to pay off debt, you can borrow against your home to get a loan that can be used to consolidate debt. Some of the most common options for this would be a home equity loan or home equity line of credit. There are many benefits to home equity loans and HELOCs that you may enjoy if you decide to use your home to pay off debt. First, both home equity loans and HELOCs most likely typically come with much lower interest rates than personal debt consolidation loans. For example, average rates for home equity loans as of January 2024 range from 3.25% to 7.94%.

A 10-year fixed home equity loan comes with average rates that range from 3.5% to 7.94%, 15-year loans range from 3.75% to 8.04%, and HELOCs come with rates that average from 1.99% to 7.24%. When you compare that to the 6% to 36% interest rates that come with a personal debt consolidation loan, chances are you may receive a much more favorable interest rate from a home loan. The downside is that you are using your home as collateral which means you could lose your home if you default on the loan.

Using a 401k loan may be a good option for some borrowers looking to consolidate debt, however, it may not be the best first choice. If you have access to other types of debt consolidation methods, you may want to pursue them first. The main reason for this is that anytime you remove money from your 401k retirement account, you risk missing out on massive gains and setting back your retirement savings. Additionally, if you should happen to fall behind on your payments and ultimately you are unable to pay the loan, then you may be subject to early withdrawal penalties and income tax implications. However, if you have bad credit, a 401k loan may be a good idea since you do not need a credit check to access the funds and taking a loan against your 401k has no impact on your credit score.

Yes, personal loans can be a good way to pay off credit card debt and hopefully build up your credit simultaneously. Debt consolidation loans are often just personal loans. Credit cards tend to have higher interest rates and they have no set pay-off date. If you continue to only make the minimum payment each month you may be spinning the tires so to speak and it may take you years to completely pay off your credit card balance. If you have multiple credit cards, then the amount of money you are spending on interest payments with no set pay-off date can add up to hundreds or thousands of dollars over time.

When you take out a personal loan to pay off your credit cards, you are doing three things. First, you are ideally qualifying for a personal loan with a much lower interest rate than your credit cards. Second, you are combining multiple monthly payments with multiple interest rates across multiple credit cards into one easy monthly payment. Lastly, you are giving yourself a firm payoff date that comes with a precalculated amount of interest you will pay over the life of the loan and a fixed and unchanging monthly payment. You will finally know an end date to when you can expect your debt to be paid in full as long as you make all your payments on time.