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Recent studies show that debt consolidation is the main reason people take personal loans.

According to April study According to Bankrate, which analyzed responses from more than 160,000 applicants, debt consolidation was the most cited reason for getting a loan in the first quarter, at 38%. An additional 5% of Bankrate study applicants chose credit card refinancing as their primary motivation.

Meanwhile, the online loan market Loan tree reported that in the last month of 2019, 35.7% of loan applicants were looking to consolidate their debt and 31.4% of applicants cited refinancing their credit card as the main reason for applying for a loan.

Additionally, both studies found that debt consolidation loans were also the largest amounts requested, much higher than loans for other needs like emergency spending, vacations, weddings, and even home renovations. domiciliary.

Below, CNBC Select explains the difference between debt consolidation and credit card refinancing, how each works and how a Personal loan could save you money.

The difference between debt consolidation and credit card refinancing

The top two reasons people get personal loans are to consolidate the debt and / or to refinance the APR on high interest debt.

Debt consolidation is when you have multiple credit cards and want to streamline your payments into one monthly bill. You can take out a personal loan large enough to pay off all accounts and then pay the lender back over a period of several months until the loan is paid off. The average American has four credit cards, and it can be difficult to keep up with multiple due dates and APRs. If keeping track of your payments is starting to take too long, debt consolidation is one way to make it easier.

Credit card refinancing is useful when you have high interest debt on one or more cards and want to save money by reducing your APR. It’s a good idea to consider refinancing your credit card debt if you know you need more time to pay off your balance, but your interest rate are so high that you feel like you cannot move on.

While these two goals are distinct, a personal loan can help you do both: simplify payments and save on interest. Whether from an online lender or a traditional bank, personal loans tend to offer lower interest rates than credit cards – but not always – so it’s important to understand the terms of the loan. ‘a loan before taking it out.

Check out our top picks for personal loans:

The CNBC Select list of 5 best personal loans

How Debt Consolidation and Loan Refinancing Work

Use a personal loan to consolidate your debts and / or refinance your APR credit card is similar to using a balance transfer card with a 0% APR period, but they work a little differently.

When you take out a personal loan, the money is usually deposited directly into your checking account so that you can use it to pay your creditors. Then you pay off the loan company in monthly installments, usually at a fixed interest rate. Personal lenders may charge a listing or original fee, but most don’t charge any fees other than interest.

Credit cards with balance transfer are an alternative to personal loans, if you can qualify for them. They offer a period (between 6 and 21 months) during which you can pay off your debt with 0% interest. They usually come with a fee of between 2% and 5%, unless you qualify for a free balance transfer card. When you open a new balance transfer card, you are requesting that your old credit card balance be transferred electronically to the new card, which you should aim to pay off within the introductory 0% interest period.

For example, both the Citi® Double Cash Card and the American bank Visa® Platinum card allow you to transfer debt from an existing credit card, but charge a fee equal to 3% of your balance ($ 5 minimum).

Balance transfer credit cards require excellent credit to qualify, while there are a variety of personal loan options for people with fair credit and good credit.

What is the average amount of a debt consolidation loan

In both studies, debt consolidation loans were the most requested type of loan of all categories.

Lending Tree reported that debt consolidation loans in 2018 averaged $ 12,670 and credit card refinancing loans were even higher at $ 14,107.

Bankrate reported that the average loan size requested for all personal loans was between $ 2,000 and $ 25,000, but within that range, 48% of loans between $ 10,000 and $ 24,999 and 52% of loans 25,000 $ + were marked for debt consolidation.

How Personal Loans Help You Save Money

Currently, consumer credit card interest rates average around 16.6% depending on the The most recent data from the Fed from February 2020. In contrast, the average APR for 24-month personal loans is 9.63%

If you hypothetically had $ 10,000 in credit card debt with an APR of 16.61%, you would pay a total of $ 2,656.53 in interest, to pay it off over three years (based on Experian APR Calculator). But if you took out a personal loan with an APR of 9.63%, you would only pay $ 1,447.90 in interest.

In the above scenario, you could benefit from a potential savings of $ 1,208.63. So while some experts are alarmed by the rapid growth in personal loans, there is no doubt that integrating them into your debt repayment plan can save you money in the long run, provided you understand the terms of the loan.

The best personal loans

When compiling our list of the best personal loans, CNBC Select has evaluated dozens of lenders. We looked at key factors like interest rates, fees, loan amounts and terms offered, as well as other features including how your funds are distributed, automatic payment discounts, service client and how quickly you can get your funds.

None of the lenders on this list charge prepayment penalties or upfront fees for processing your loan. (Learn more about our methodology below.)

Our methodology

To determine which personal loans are the best, CNBC Select analyzed dozens of U.S. personal loans offered by online and physical banks, including major credit unions, with no set-up or enrollment fees, with fixed rate APRs, and flexible loan amounts and terms to meet to a range of financing needs.

When selecting and ranking the best personal loans, we focused on the following features:

  • No creation or registration fees: None of the lenders on our list charge borrowers an upfront fee for processing your loan.
  • APR at fixed rate: Variable rates can fluctuate over the life of your loan. With a fixed rate APR, you lock in an interest rate for the life of the loan, which means your monthly payment will not vary, making it easier to plan your budget.
  • Flexible minimum and maximum loan amounts / conditions: Each lender offers a variety of financing options that you can customize based on your monthly budget and how long it takes to pay off your loan.
  • No early repayment penalties: The lenders on our list do not charge borrowers for prepayment of loans.
  • Simplified application process: We looked at whether lenders offer same-day approval decisions and a fast online application process.
  • Customer service: Each loan on our list provides customer service available by phone, email or secure online messaging. We have also opted for lenders who have an online resource center or advice center to help educate you about the personal loan process and your finances.
  • Disbursement of funds: The loans on our list provide funds quickly by wire transfer to your checking account or in the form of a paper check. Some lenders (which we have noted) offer the option of paying your creditors directly.
  • Automatic payment discounts: We have noted lenders who reward you for signing up for automatic payment by lowering your APR from 0.25% to 0.5%.
  • Creditors payment limits and loan amounts: The above lenders offer loans of various sizes, from $ 500 to $ 100,000. Each lender advertises their respective payment limits and loan amounts, and a pre-approval process can give you an idea of ​​your interest rate and monthly payment for that amount.

After reviewing the features above, we’ve sorted our recommendations based on overall financing needs, debt consolidation and refinancing, small loans, and next day financing.

Note that the advertised rates and fee structures for personal loans are subject to fluctuation based on the Fed rate. However, once your loan agreement is accepted, a fixed rate APR will guarantee the interest rate and the monthly payment will remain constant for the duration of the loan. Your APR, monthly payment, and loan amount depend on your credit history and creditworthiness. To take out a loan, lenders will conduct a serious credit check and ask for a complete application, which might require proof of income, identity verification, proof of address, etc.

US Bank Visa® Platinum card information was independently collected by CNBC and was not reviewed or provided by the card issuer prior to posting.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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