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Dear credible money coach,
This is my situation:
- Credit score range 655 to 677
- No late payments over 30 days since October 2020
- Two outstanding loans (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, $ 1,500 balance, and 9% monthly interest
- Monthly auto payment of $ 404
- Monthly mortgage is $ 764 (13 year old homeowner)
I am employed with a net income of $ 3,000 per month.
Does it make sense to apply for a personal loan to pay off the two outstanding loans and the furniture bill? I want to apply for $ 6,000. The difference would be laying carpet in my house. Are there any personal loan companies I can apply to that would “pre-approve” a tough request? – Latoshia
Great question Latoshia and great job taking stock of your current financial situation. Whenever you are considering getting a new loan, it is important to keep track of how much you currently owe – which you are obviously doing.
We come to the first part of your question: Does it make sense to take out a personal loan to pay off the two outstanding loans and the furniture installment loan? This can be useful when you are getting a new loan with an interest rate and an APR that are lower than what you are currently paying on these three existing loans.
And if combining these three loans into one personal loan helps you reduce your total monthly payments, that would be even better! Just be careful not to extend the term of the new loan beyond your current payout dates, and be sure to factor in closing costs when calculating the numbers.
Since your credit is good, you may be able to qualify for an interest rate of less than 24% – the highest rate you will pay.
Another option to consider
They also say that they would like to borrow some money to improve the home. Since you’ve been a homeowner for 13 years – and property values are currently high – you have likely built up equity in your home.
I usually don’t advocate turning unsecured debts like credit cards or installment loans into debt that is backed by your home. But home building is a legitimate reason for using home equity. And the current refinancing rates are at historic lows.
In your situation, you have two options. You can take out a new personal loan to pay off the installment loans and a home equity loan to pay for your new carpet. However, it can be difficult to get two loans at the same time.
The other option would be a home equity loan or a cash-out refinancing that you can use to pay off the installment loans and finance your home improvement. However, if you choose to go down this route, I highly recommend that you only cash out or borrow the exact amount that you need. Avoid the temptation to pull more equity out of your home than you need. And don’t use home equity funds to pay off the car – it’s a depreciating asset.
As for prequalification, without affecting your balance …
… You can absolutely get an idea of the interest rates you can get on a personal loan without compromising your credit score – by visiting Credible.
Credible is free to use, has no hidden fees, and allows you to view your pre-qualified installments from multiple lenders in just two minutes. You can use it to check personal loan and home refinancing rates without affecting your creditworthiness.
Do you need credible advice on a money question? Send an email to our Credible Money Coaches at [email protected] A money coach could answer your question in an upcoming column.
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