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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 open loans (money used to pay toward household bills since June 2020) with combined outstanding balance of $3,800 and combined interest rate of 24%
- One open furniture account, balance $1,500 and monthly interest rate at 9%
- Monthly car payment of $404
- Monthly mortgage is $764 (homeowner 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 apply for $6,000. The difference would be to install carpet in my home. Are there any personal loan companies I can apply to that would give a “pre-approval” prior to a hard inquiry? — Latoshia
Great question Latoshia, and great job taking stock of your current financial situation. Whenever you’re considering taking out new credit, it’s critical to have a handle on how much you currently owe — which you obviously do.
Let’s address the first part of your question: Is it a good idea to take out a personal loan to pay off the two open loans and the furniture installment loan? This could make sense if you’ll be able to get a new loan with an interest rate and APR that are lower than what you’re currently paying on those three existing loans.
And, if consolidating those three loans into one personal loan will help 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 pay-off dates, and be sure to account for closing costs when crunching the numbers.
Since your credit score is good, you may be able to qualify for an interest rate lower than 24% — the highest rate you’re paying.
Another option to consider
You also say you’d like to borrow some money to make home improvements. Since you’ve been a homeowner for 13 years — and since home values are high right now — you likely have equity built up in your home.
Normally, I don’t advocate turning unsecured debt like credit cards or installment loans into debt that’s secured by your home. But making home improvements is a legitimate reason for tapping home equity. And current refinance 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 might be difficult to get two loans at the same time.
The other option would be a home equity loan or cash-out refinance that would allow you to pay off the installment loans and fund your home improvement. If you decide to go that route, however, I’d strongly urge you to only cash out or borrow the exact amount you need. Resist the temptation to pull more equity than you need out of your home. And don’t use home equity funds to pay off the car — it’s a depreciating asset.
As for prequalifying without dinging your credit …
… You absolutely can get an idea of what rates you might get on a personal loan without affecting your credit — by visiting Credible.
Credible is free to use, has no hidden fees, and allows you to see your prequalified rates from multiple lenders in as little as two minutes. You can use it to check personal loan and home refinance rates without affecting your credit.
Need credible advice for a money-related question? Email our Credible Money Coaches at firstname.lastname@example.org. A Money Coach could answer your question in an upcoming column.
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