Racked Up Holiday Debt? How a Personal Loan Could Be Your Ticket to Making It Less Expensive

The less interest you're charged on your debt, the less you'll have to spend.

If you're closing out the 2022 holiday season with a pile of credit card debt, try not to beat yourself up. This was a very hard year to cover extra expenses due to inflation. And so if your holiday purchases put you over the edge and forced you to take on some credit card debt, rather than feel guilty about it, instead focus on paying that debt off as easily as possible. And in that regard, a personal loan is an option worth considering.

A solution that might work out well for you

A personal loan allows you to borrow money for any purpose, whether it's fixing up your home, taking a vacation, or even starting a business. It's also not uncommon for people to use personal loans as a means of consolidating debt.

In fact, what makes personal loans such a great option for credit card debt consolidation is that they tend to come with competitive interest rates. Of course, these days, the cost to borrow is up across the board due to recent interest rate hikes on the part of the Federal Reserve. But still, you may find that a personal loan charges a lot less interest than what your credit cards are charging. And so if you take out a personal loan and use your proceeds to pay your cards off, you might save yourself a lot of money overall.

Plus, when you carry a credit card balance, there's the potential for the interest rate you're being charged to climb over time. Personal loans don't work that way. Rather, when you sign your loan documents, you're given an interest rate that will be fixed throughout the life of your loan. So if you sign a $5,000 personal loan at 7% interest, that's the rate you'll be looking at until your loan is paid off (assuming you don't refinance it).

How to qualify for a personal loan

Personal loans are unsecured, which means they aren't backed by a specific asset. And that can make qualifying for one a little tricky.

When you take out an auto loan, for example, your lender has the right to repossess your vehicle if you don't keep up with your payments. With a personal loan, there's really no specific asset your lender can go after if you fall behind on your payments, so there's more risk involved.

For this reason, you'll generally need decent credit to qualify for a personal loan. And if you have poor credit, you should expect to get stuck with a higher interest rate on a personal loan, since your lender will assume it's taking on more risk.

In fact, if your credit score really took a hit this year, then you may want to hold off on applying for a personal loan, because it may not end up being all that more cost-effective than simply repaying your credit cards. But if your credit score is in good shape, then a personal loan could be your ticket to shedding your leftover holiday debt as quickly and painlessly as possible.