The Financial Solution That Helped Me Consolidate Debt and Pay Off a Car

Used correctly, a personal loan can be a great financial solution strategy. Misused, they can increase your overall debt load and saddle you with additional monthly payments.

Personal loans are an attractive savings strategy because they typically have much better interest rates than credit cards (at least for highly qualified borrowers). This makes them a good option for consolidating high-interest credit card debt into one fixed monthly payment. They can also help pay for emergency expenses and unexpected home or auto repairs and provide fast cash to pay off a hefty bill.

The first personal loan I took out significantly reduced the amount of interest I paid on a high-interest credit card. I used the funds from my second personal loan to pay off an auto loan so I could have the title in hand during a private sale.

Here’s how the process worked and some pros and cons of using a personal loan in both situations.

Personal Loan #1: Reducing High-Interest Debt

Debt consolidation is the top reason borrowers take out personal loans. According to LendingTree, 54% of personal loan borrowers in 2024 used their funds to pay down debt, with nearly 14% using their loans to refinance debt on high-interest credit cards.

With credit card debt topping $1 trillion for the first time in 2024, more and more consumers are seeking a way to lower their credit card payments, especially as credit card interest rates skyrocketed after the Federal Reserve began hiking interest rates. According to WalletHub, the average assessed interest rate on credit card balances that incurred finance charges in May of 2020 was under 16%. By February of 2024, that rate had jumped to 22.63%.

That’s roughly the scenario I faced when I took out a $20,000 personal loan to refinance the balance on a high-interest credit card. A banner offer for debt consolidation popped up one day when I was accessing my bank account online, and all I had to do was fill in some blank fields and request an amount. I was instantly approved, and the funds landed in my checking account the next day.

Once I received the funds, I paid off the balance of my high-interest credit card and began making payments on my loan.

Here’s a side-by-side comparison of the savings:

Although I paid more each month, I realized potential interest savings of more than $25,000 because I paid off the personal loan about one year early. Even if I had made the same $617 payment on the credit card, I would still have paid about $9,800 in interest over the four-year time frame required to zero out the card balance.

It’s worth mentioning that my favorable interest rate was secured before the Federal Reserve’s series of interest rate hikes beginning in March 2022. Current rates may be higher.

Where Will You Find the Best Rates for Your Financial Solution?

Finding the right lender will save you money. The best way to know if you’re getting a competitive loan rate is to compare offers from competing lenders like those below.

Personal Loan #2: Paying off an Auto Loan

Supply chain delays following the global pandemic and a global shortage of semiconductor chips from 2020-2024 led to significant price increases across a wide range of industries.

The auto industry was one of the hardest hit—more than 11 million new vehicles were removed from the production pipeline in 2021 alone due to computer chip shortages. Used car prices shot through the roof as a result, and the Honda Accord I purchased as a secondary runabout vehicle was worth several thousand more in 2022 than the $15,000 I paid for it in 2019.

I wanted to sell the car in a private sale to capitalize on the scarce chance to realize equity in an automobile, so I took out a second personal loan to pay off the $12,000 balance of the auto loan and get the title from the lender.

This wasn’t a complete win because I opted to bank the cash rather than immediately pay off the personal loan. Prudence, of course, dictates immediate payback of the loan, but the cash was used for other essential purposes, and as of this writing, I still have about half the original balance to pay back.

How Personal Loans Work

Personal loans are slightly unique in the world of consumer lending in that borrowers don’t need collateral to secure loans that, in some instances, can exceed $50,000.

Your credit score largely determines your creditworthiness, and personal loan interest rates and terms are more favorable for borrowers with good (670-739), very good (740-799), and exceptional (800-850) credit scores.

LendingTree reports that more than 23.5 million Americans have personal loan debt, and at the end of 2024, borrowers owed more than $245 billion in personal loan debt.

Personal loans have exploded in popularity because borrowers can use the funds for whatever they want. Other forms of lending are tied to physical assets such as cars or homes.

Still, personal loans can be used to pay off credit cards and auto loans, remodel a kitchen or bathroom, install backyard landscaping or a swimming pool, or for any number of other purposes.

Loan qualification standards vary between lenders, but creditworthiness is typically the primary factor banks look at to determine loan amounts and interest rates. Depending on the lender, you may also have to document employment history and gross income. Loan amounts can be as low as $1,000 or as high as $100,000, though many lenders don’t offer personal loans greater than $50,000.

Pros and Cons of Personal Loans

As noted from the examples above, personal loans can be a valuable financial solution if you use good judgment.

It can be a bit too easy for well-qualified borrowers to take out a personal loan — in my case, a few mouse clicks and keystrokes led to $20,000 landing in my checking account in less than 24 hours.

Like any financial solution, personal loans must be used correctly. Misuse of the funds can cause additional damage to your financial situation and wreak havoc on your credit score.