What's The Difference?

A personal loan is similar to a revolving credit loan in that it has only your good name to guarantee payback. These unsecured loans have bigger risk than car and home loans because there is nothing to be repossessed in the event that you fail to pay. While failing to pay will wreck your credit rating it is of little consolation to the lender who is out the money. It is for this reason that credit cards and personal loans have higher interest rates than mortgages or car loans.

When shopping for a personal debt consolidation loan though you will notice that these loans still have lower rates than their credit card counterparts. This is because they are term loans. A term loan is a loan that is made with a time horizon. Over the loans term a predetermined amount of each payment is interest and principal. Credit card revolving loans are open-ended and require that only minimum payments of interest be paid--causing most credit card consumers to only pay interest while the principal remains the same or grows.

How It Works

Sound risky to you? Well it does to the lender, even though it is very profitable, so they charge you more to borrow this way. The key thing to understand in any financial transaction is risk. Risk is what costs you, so the more the risk the higher the rate. Term loans that are neatly packaged are less risk because they offer both lender and borrower less variables/surprises in regard to outcome.

The prudent borrower will convert all of the credit card debt into much cheaper and tractable personal loan debt. Once this is done you can close all of your credit card accounts so you will know when the debt will finally be paid off.

TIP Once you have closed your credit card accounts call your lender and try and negotiate a lower rate. If your lender won't bite, find one that will.