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Loans

How to use a personal loan to pay off your debt faster

Debt consolidation is a common tactic for paying off debt a little quicker.

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Paying down debt can be both expensive and exhausting — especially when you have multiple debts to account for each month. And with the added stress of interest rates that are higher than you'd like, it can feel like you'll never be debt-free.

There are lots of popular debt pay off strategies, like the snowball method or the avalanche method. But another common tactic for becoming debt-free a little faster is through debt consolidation — and using a personal loan to do it makes the process as painless as possible.

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What is debt consolidation?

Debt consolidation is the process of taking multiple debts — like credit card debts or multiple student loan debts — and "rolling" them into one debt with one monthly payment and one interest rate. You may also typically receive a lower interest rate when you consolidate your debt, so this strategy also makes sense if you want to save on interest charges.

How does debt consolidation work?

One way to consolidate multiple debts is to use a personal loan. When you apply for a personal loan, you apply for a lump sum of money that typically gets deposited into your bank account so you can use it as needed.

When using a personal loan for debt consolidation, though, the lender may make a direct payment to the lenders who hold your other debts. Then, you'll only be responsible for paying back the new personal loan at a fixed monthly payment and a new interest rate.

Often times, this interest rate is lower than the rates you've been paying on your other debts. A lower interest rate means you'll spend less money on payments over the lifetime of the loan. And, you may actually pay off the loan faster since it may buy you more room to put a little extra cash toward the principal.

Of course, though, the interest rate you receive will depend on your creditworthiness. In other words, a higher credit score can get you a lower interest rate and a poor credit score can leave you with an interest rate on the higher end of a lender's range.

And since you're essentially "replacing" your multiple debts with one new loan when you consolidate, you'll only have to worry about making one monthly payment — as opposed to just chipping away slowly at various debts. If the personal loan you used to consolidate the debts doesn't have a prepayment penalty (a.k.a., an early payoff fee), you might consider taking the same amount of money you would have paid for all your debts and throwing it all at the personal loan payment. This can help you pay back the loan even quicker (and save even more on interest charges).

Again, though, the key here is to look for personal loan lenders that don't charge a prepayment penalty. This is an additional fee charged by some lenders if you pay off your loan early. The actual cost of a prepayment penalty will vary depending on how it's being charged. It can be charged as a percentage of your loan balance, as a fixed fee, or as the amount of interest a lender would miss out on since you've paid off the loan early. As a result, a prepayment penalty could cost you big time.

Debt consolidation loans with no prepayment penalty

SoFi Personal Loans, which is on our list of best personal loans to consolidate debt, allows you to consolidate different kinds of debt — including student loan debt. In addition to no prepayment penalty, this lender also doesn't charge a late fee or any origination fees, making it a bit more affordable to use compared to lenders who do charge these fees. Keep in mind, though, that you'll generally need a good or excellent credit score to qualify.

SoFi Personal Loans

  • Annual Percentage Rate (APR)

    7.99% to 23.43% when you sign up for autopay

  • Loan purpose

    Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses

  • Loan amounts

    $5,000 to $100,000

  • Terms

    24 to 84 months

  • Credit needed

    Good to excellent

  • Origination fee

    None

  • Early payoff penalty

    None

  • Late fee

    None

See our methodology, terms apply.

Pros

  • No origination fees, no early payoff fees, no late fees
  • Unemployment protection if you lose your job
  • DACA recipients can apply with a creditworthy co-borrower who is a U.S. citizen/permanent resident by calling 877-936-2269
  • Can have more than one SoFi loan at a time (state-permitting) 
  • May accept offer of employment (to start within the next 90 days) as proof of income
  • Co-applicants may apply

Cons

  • Applicants who are U.S. visa holders must have more than two years remaining on visa to be eligible
  • No co-signers allowed (co-applicants only)

If your credit score is closer to average, you can still qualify for an Upstart Personal Loan. Upstart generally requires a 600 FICO score but the lender still accepts applicants with insufficient credit history. It can be used for debt consolidation and there's no early pay off fee, however, there is an origination fee — it'll run you 0% to 8% of the loan amount. There is also a late fee, which would be either 5% of the amount due or $15, whichever is greater.

Upstart Personal Loans

  • Annual Percentage Rate (APR)

    5.6% to 35.99%

  • Loan purpose

    Debt consolidation, credit card refinancing, home improvement, wedding, moving or medical

  • Loan amounts

    $1,000 to $50,000

  • Terms

    36 and 60 months

  • Credit needed

    Credit score of 300 on at least one credit report (but will accept applicants whose credit history is so insufficient they don't have a credit score)

  • Origination fee

    0% to 10% of the target amount

  • Early payoff penalty

    None

  • Late fee

    The greater of 5% of last amount due or $15, whichever is greater

See our methodology, terms apply.

Pros

  • Open to borrowers with fair credit (minimum 300 score)
  • Will accept applicants who have insufficient credit history and don't have a credit score
  • No early payoff fees
  • 99% of personal loan funds are sent the next business day after completing required paperwork before 5 p.m. Monday through Friday

Cons

  • High late fees
  • Origination fee of 0% to 10% of the target amount (automatically withheld from the loan before it's delivered to you)
  • $10 fee to request paper copies of loan agreement (no fee for eSigned virtual copies)
  • Must have a Social Security number

And like SoFi, Marcus by Goldman Sachs Personal Loans does not charge late fees, origination fees or early payoff fees. This lender will send payments directly to up to 10 creditors so you don't have to worry about doing the heavy-lifting.

Marcus by Goldman Sachs Personal Loans

  • Annual Percentage Rate (APR)

    6.99% to 24.99% APR when you sign up for autopay

  • Loan purpose

    Debt consolidation, home improvement, wedding, moving and relocation or vacation

  • Loan amounts

    $3,500 to $40,000

  • Terms

    36 to 72 months

  • Credit needed

    Good

  • Origination fee

    None

  • Early payoff penalty

    None

  • Late fee

    None

See our methodology, terms apply.

Pros

  • No origination fees, no early payoff fees, no late fees
  • Will send direct payment to up to 10 creditors (for debt consolidation)
  • Monthly VantageScore updates
  • Earn a one-month payment vacation (interest-free) after making 12 on-time consecutive payments
  • Ability to choose your due date when you accept the loan (and again up to two more times after that)

Cons

  • Does not accept joint applications and/or co-signers
  • Not the fastest funding (can take a week or 10 business days)
  • Slightly tougher approval requirements (especially for larger loans/lower interest)

Bottom line

Debt consolidation can be a handy strategy for paying off multiple debts as quickly (and as affordably) as possible. This can be especially true if the personal loan you use to consolidate your debts doesn't charge you a penalty for paying back the balance early. But most importantly, you should always make sure that personal loans fit your personal needs before you sign up for one.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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