Study: Personal Loans Can Help Solve Past Debt Problems
by Christy Bieber | Sept. 12, 2019
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Could a new loan really help you deal with existing debt? A recent study suggests that it could.
If you are already in trouble with debt and behind on payments, it may seem as though borrowing more money is just about the last thing you should do. However, a new study from TransUnion found that for a significant percentage of borrowers facing financial trouble, taking out a new loan could be instrumental in helping them to solve their debt problems.
According to the TransUnion research, close to one-third of borrowers who were behind on debt payments experienced an improvement in delinquent debts when they took out a new personal loan. Furthermore, nearly one-quarter of borrowers who obtained a new personal loan performed well at paying it off.
This may come as a surprise, but it makes a lot of sense when you look at how a new personal loan could help borrowers deal with debt that’s currently overwhelming them.
Here are a few key ways that a new loan might help solve existing debt problems.
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1. A new loan can reduce the interest paid on existing debts
Many people turn to their credit cards or payday loans during times of temporary financial trouble.
Unfortunately, as soon as you’ve taken on high interest consumer debt, paying it off can be really difficult. With many of these types of debt, the interest and fees can be so expensive that you’re making huge monthly payments and barely reducing what you owe.
If you qualify for a new personal loan at a lower rate, it can help. For example, if you have a credit card that’s charging you 15% or more in annual interest and you can score a personal loan at a 10% interest rate, your debt will be significantly cheaper and easier to repay.
2. A new loan can reduce your monthly payments on existing debts
Not only can a new personal loan make your debt cheaper in the long run, but it can also lower your monthly payments in the following three scenarios:
- If you can lower your interest rate. When you’re charged less interest, less money is needed each month to cover interest costs. As a result, your total monthly payment may be lower, even if you keep the same repayment timeline.
- If you can extend your repayment deadline. If you give yourself more time to pay off a debt, you’ll be paying less each month toward what you owe. Be aware that this approach can raise total repayment costs, even if you’ve reduced the interest rate on your debt, because you’ll be paying that interest for a much longer period. Still, if you can't afford your current monthly payments and a new personal loan would help to bring them within your budget, it may be worth considering.
- If you can pay off multiple creditors. If you owe many creditors, each debt will likely have its own minimum monthly payment, and they all add up. If you take out a new personal loan to pay off multiple existing debts, your single monthly payment may be less than the sum of the other minimum payments.
If any of these scenarios apply to you, then it is worth exploring the possibility of a new personal loan ASAP.
3. A new loan can help prevent fees
If you have maxed-out credit cards and can’t afford to pay them off, you may have to deal with over-the-limit and late fees. If you’ve taken out payday loans and need to keep doing so to pay them back, you could end up paying fees on each new loan.
A new personal loan could help you stop these fees from hitting you over and over. Many lenders offer personal loans with no origination fees, application fees, or other upfront fees. You could use your new personal loan to pay off your payday loans and credit cards, and then just work on paying down your new debt without having to worry about a bunch of new fees every month.
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Want to pay off debt faster? Check out our shortlist of the best personal loans for debt consolidation and cut your monthly payment with a lower rate.
Should you take out a new loan if you’re struggling with debt?
Getting a new loan when you’re already in debt can be difficult -- especially if you miss a payment and your credit isn’t great. That’s why it can be important to act quickly to refinance high-interest debt with a more affordable loan.
So if you are able to get a new loan at a lower rate, with a reduced monthly payment, this could be a wise approach that helps you avert financial disaster. Just be sure you can pay off the new loan you take out and live within your means so you don’t end up further in debt than you were in the first place.
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About the Author
Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
