Why a Personal Loan Is Your Answer to Getting Out of Holiday Debt

holiday debt mess

During the holidays, you probably binged on luxuries — and now in the new year you’re certainly feeling the aftermath. The holidays can cause you to overspend on gifts, food and events causing you to suffer major debt in January. Often the response to this sort of lavish spending is to keep your debt balance on a credit card and let that balance roll forward. That is an expensive mistake, however, as paying off debt is not always easy.

The average American had $5,327 in credit card debt at the end of 2014, and spending habits haven’t seemed to change much in 2015. Average balances at the end of the third quarter of 2015 were hovering around $5,200. But have no fear: Debt consolidation with a personal loan offers a cheaper way to recover from your holiday spending hangover.

Related: 5 Ways to Make a Better Plan for Your Money in 2016

Personal Loans Offer Better Debt Consolidation

A personal loan can offer you the opportunity to consolidate outstanding credit card balances at lower interest rates. Personal loan rates vary dramatically based on a variety of personal circumstances, but it is to your advantage to shop around for the best rate you can get.

Save for Your Future

If you’re carrying substantial debt on credit cards as a result of holiday shopping, a personal loan with lower interest rates can help. Credit card use has been increasing over the last couple of years, according to TransUnion, and that trend is expected to continue in 2016 as more and more consumers make use of credit cards and other revolving debt options.

Learn: Why 2016 Is the Year of the Entrepreneur 

Personal Loans Offer Lower Interest Rates

Given these trends, more and more people will likely lean on credit cards as a solution to holiday debt. That is a big mistake as credit cards are one of the most expensive forms of credit out there. Other than payday lending, few forms of credit are more destructive to your personal financial health than credit cards. Average credit card interest rates are between 16 and 18 percent. At this rate of interest, carrying an average balance of $5,200 and making a $25 minimum payment plus interest would take years to pay off.

Save for Your Future
Year Starting Balance Interest Payment New Balance
2016 $5,200 $884 $1,184 $4,900
2017 $4,900 $833 $1,133 $4,600
2018 $4,600 $782 $1,082 $4,300
2019 $4,300 $731 $1,031 $4,000
2020 $4,000 $680 $980 $3,700
2021 $3,700 $629 $929 $3,400
2022 $3,400 $578 $878 $3,100
2023 $3,100 $527 $827 $2,800
2024 $2,800 $476 $776 $2,500
2025 $2,500 $425 $725 $2,200
2026 $2,200 $374 $674 $1,900
2027 $1,900 $323 $623 $1,600
2028 $1,600 $272 $572 $1,300
2029 $1,300 $221 $521 $1,000
2030 $1,000 $170 $470 $700
2031 $700 $119 $419 $400
2032 $400 $68 $368 $100
2033 $100 $12 $112 0

In the example above, the consumer would take over 15 years to pay off their holiday debt for 2015 alone, and would spend more than $8,100 on interest payments. There is a better way to deal with holiday debt, as personal loan interest rates on a $10,000 unsecured loan can range from 6 percent to 9 percent annually.

Personal Loans Take Less Time and Money to Pay Off

A personal loan can offer an individual tremendous savings. Consider someone with $3,000 in debt on one credit card at an 18% APR, and $2,500 in debt on a second card at a 16% APR. Assuming the individual can afford $1,200 in annual payments towards the debt, they would save $6,103 in interest and pay off their loan five years faster with a personal loan at 8% APR than with a credit card at the higher rate.

Credit Card Payments
Year Starting Balance Interest Payment New Balance
2016 $5,500 $1,018 $1,200 $5,318
2017 $5,318 $984 $1,200 $5,101
2018 $5,101 $944 $1,200 $4,845
2019 $4,845 $896 $1,200 $4,542
2020 $4,542 $840 $1,200 $4,182
2021 $4,182 $774 $1,200 $3,755
2022 $3,755 $695 $1,200 $3,250
2023 $3,250 $601 $1,200 $2,652
2024 $2,652 $491 $1,200 $1,942
2025 $1,942 $359 $1,200 $1,101
2026 $1,101 $204 $1,200 $105


Personal Loan Payments
Year Starting Balance Interest Payment New Balance
2016 $5,500 $457 $1,200 $4,757
2017 $4,757 $395 $1,200 $3,951
2018 $3,951 $328 $1,200 $3,079
2019 $3,079 $256 $1,200 $2,135
2020 $2,135 $177 $1,200 $1,112
2021 $1,112 $92 $1,200 $4
Save for Your Future

In this scenario, the credit cards together charge the individual $7,806 in interest based on 18% APR and 16% APR, assuming equal $50 payments are made to each card every month. The personal loan, however, only charges you $1,705 in interest, saving you nearly 82 percent of the total interest payments required by a credit card loan and cutting your debt repayment time almost in half.

For high interest credit cards which can carry a 24% APR in many cases, the savings are even more dramatic. Additionally, a personal loan often has a fixed rate of interest compared to credit card rates which can be — and often are — increased by credit card companies at every opportunity.

Pay Off Your Holiday Debt and Get Back on Track

Paying off debt from your holiday spending is a lot easier with a personal loan than with a conventional credit card. Debt consolidation using a personal loan makes a lot of financial sense for most everyone who has a large outstanding credit card balance.

There are many new places to look for personal loans from platform lending websites to traditional financial institutions who are now getting into the personal loan market. With all of the new personal loans opportunities out there, almost everyone should be able to get a loan that to help them recover from their over-spending this holiday season and get back on track in the new year.

Keep Reading: 12 Influential Experts Give Their Top Money Tip for 2016

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About the Author

Michael McDonald

Michael McDonald is an assistant finance professor and consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance and his research has been quoted in the Wall Street Journal and Bloomberg. He provides corporate consulting through Connecticut Expert Witness Consulting and teaches classes in the areas of corporate finance and investments.

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