Do I have to take out a personal loan to repay other debts and renovate my home?
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Dear credible money coach,
Here is my situation:
- Credit score range 655 to 677
- No late payment of more than 30 days since October 2020
- Two open loans (money used to pay household bills since June 2020) with a combined outstanding balance of $ 3,800 and a combined interest rate of 24%
- An open furniture account, balance of $ 1,500 and monthly interest rate of 9%
- $ 404 monthly car payment
- Monthly mortgage is $ 764 (owner for 13 years)
I am employed with a monthly net income of $ 3,000 per month.
Is it a good idea to apply for a personal loan to pay off the two open loans and the furniture bill? I would like to ask for $ 6,000. The difference would be to install carpet in my house. Are there any personal loan companies that I can apply to that would give “pre-approval” before a full investigation? – Latoshia
Great question, Latoshia, and great job taking stock of your current financial situation. Whenever you are considering taking on new credit, knowing how much you currently owe is essential, which is obviously what you are doing.
Let’s tackle the first part of your question: is it a good idea to take out a personal loan to repay the two open loans and the installment loan? It might make sense if you can get a new loan with a lower interest rate and APR than what you are currently paying on these three existing loans.
And if consolidation these three loans in one personal loan will help you reduce your total monthly payments, It would be even better! Just be careful not to extend the term of the new loan beyond your current repayment dates, and be sure to factor in closing costs when you calculate the numbers.
Since your credit score is good, you may be eligible for an interest rate of less than 24%, the highest rate you pay.
Another option to consider
You also say that you would like to borrow money for renovations. Since you’ve been a homeowner for 13 years and home values are high right now, you’ve probably built up equity in your home.
Normally, I don’t advocate turning unsecured debt like credit cards or installment loans into debt secured by your home. But making home improvements is a legitimate reason to tap into home equity. And current refinancing rates are at historic lows.
In your situation, you have two options. You could take out a new personal loan to pay off the installment loans, and a home equity loan to pay for your new carpet. But it can be difficult to get two loans at the same time.
The other option would be a home equity loan or refinancing of collection this would allow you to pay off installment loans and finance your home renovation. If you do decide to go this route, however, I highly recommend that you only withdraw or borrow the exact amount you need. Resist the temptation to take more equity out of your home than you need. And don’t use the home’s equity to pay off the car – it’s a depreciating asset.
As for prequalifying without undermining your credit …
… You can absolutely get an idea of the rates you could get on a personal loan without affecting your credit – by visiting Credible.
Credible is free, with no hidden fees, and allows you to see your prequalified rates with multiple lenders in as little as two minutes. You can use it to check Personal loan and home refinancing rate without affecting your credit.
Need credible advice on a money-related issue? Email our credible money coaches at [email protected]. A Money Coach could answer your question in a future column.
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About the Author:
Dan Roccato is a Clinical Professor of Finance, School of Business, University of San Diego, Credible Money Coach personal finance expert, published author and entrepreneur. He has held leadership positions at Merrill Lynch and Morgan Stanley. He is a recognized expert in personal finance, global securities services and corporate stock options. You can find it on LinkedIn.