Strategic Debt Relief: How Personal Loans Can Help

You aren’t alone if you feel you are overwhelmed with debt and have creditors contacting you to collect. But don’t worry! In this post, I’ll discuss using personal loans as a strategic tool for debt relief. Whether you’re drowning in credit card bills, medical expenses, or student loans, personal loans can be your lifeline to financial freedom.

Key Points

• Even with bad credit, you can still get a personal loan.
• Personal loans can be used as an effective debt relief strategy.
• Use a personal loan to settle with a judgment creditor.

A personal loan can be used in various situations regarding debt relief strategies. For example, I got a business loan during the COVID-19 pandemic to avoid going through personal savings and increasing my credit card debt, and last year, I got a personal loan to pay for my steel garage.

While I could have paid for the garage installation with my credit card, the interest rate on the personal loan was half what it is on my credit card, so it was a no-brainer for me.

What You Need to Know About Personal Loans

First, know that a personal loan can be secured or unsecured debt. While most people think of loans as unsecured, a lender may require collateral. For example, the lender may request collateral if you have a low credit score or a negative credit history. In that case, the lender could ask that the loan be secured by your car’s equity or other assets such as a 401k or IRA account.

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In my situation, since I had terrible credit, I knew that I would get denied for a loan with the bank, so when I received the settlement funds from a personal injury case, I opened a new savings account with those funds and then asked the bank for the personal loan offering those funds as collateral. So, it is possible to get a bank loan with a bad credit score, but the process is much easier if an asset can secure the loan.

In my case, I had two reasons to obtain the personal loan:

• To improve my credit score, and
• I needed to establish a relationship with a major bank since, for years, I was banking at a local community bank. Since I knew I was relocating, I needed access to a bank with branches nationwide.

That simple tactic less than five years ago has resulted in establishing a relationship with the bank and borrowing a total of $35,000 in personal loans and a credit card with an $8,500 limit. Initially, my credit card limit was $2,000.

My next move will be to refinance my mortgage with the same bank in approximately three years since my interest rate will increase after having a five-year fixed rate.

Payoff Credit Card Debt with Personal Loans

A personal loan could also be used as debt relief by paying off high-interest credit cards. For example, a personal loan could have 12% interest, but the credit card interest rate is twice that amount. That difference of 12% could save you hundreds of dollars each month in interest payments.

Also, by using a personal loan to pay off high-interest rate credit cards, there’s the convenience of one monthly payment by consolidating the credit card debt, which could make it easier for budgeting purposes. However, the risk is that with a zero balance on credit cards, if the available credit is used again, there’s more debt and the risk of defaulting on payments.

Using a Bank Loan to Settle a Lawsuit with a Creditor

If a creditor has threatened to sue you or already has a judgment against you, you can try to settle the debt by offering a lump sum payment. This could result in savings in the long run. For example, suppose a creditor is suing you for $10,000, but you were able to secure a personal loan to offer a lump sum for a lesser amount.

Generally, a creditor prefers a lump sum payout, and this would prevent any enforcement action such as a wage garnishment. The only issue is the percentage of the judgment or debt balance the judgment creditor will accept.

Unfortunately, there’s no magical number, as that depends on multiple issues. I’ve settled cases for less than ten percent and as high as fifty percent. However, my experience has been that the older the debt is, the lower the settlement amount. But it is worth a try to negotiate with a judgment creditor to stop the wage garnishment. Often, debtors don’t realize that even if the creditor already has a judgment, it doesn’t mean the debt can’t be negotiated.

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However, use a personal loan payoff calculator and include interest to estimate the monthly payment to determine how much is being paid over the life of the loan. I’ve seen situations where I’ve advised the client that a wage garnishment would cost less monthly than a personal loan.

For example, the length of personal loans is typically three to five years. But if a garnishment would take ten years to pay off and allows the client to get organized financially, then the garnishment is a better option. Also, consider consulting with a bankruptcy attorney to determine all your options.

Every case is different, and at the end of the day, the best option is the one that favors you financially.

To summarize, a personal loan could have numerous benefits:

• to pay off high-interest credit cards.
• to consolidate credit card debt.
• to stop wage garnishment.
• Use a personal loan calculator to determine the monthly payment and the best options for you.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon books. To access my YouTube channel, click this link.

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• Bankruptcy
• Your Wallet

Please note the information on this site does not constitute legal advice and should be considered for informational purposes only.