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- The Federal Reserve cut interest rates for the third time since late July.
- If you’re currently paying off credit-card debt and have ever considered consolidating it with a personal loan, now is probably the time to do it.
- The average interest rate borrowers with credit-card debt paid in September was 16.97%, while the average rate on personal loans was 10.07% – the largest spread in at least 20 years.
- Credible can help you compare personal loans to find the right loan for you, at the right price »
- Read more personal finance coverage.
The Federal Reserve has lowered its benchmark interest rate for the third time since late July, to a range of between 1.5% and 1.75%.
The cuts were made in an effort to inject cash into the economy and side-step a recession. It’s generally good news for consumers, as lower rates make borrowing money cheaper.
It’s never recommended to take on high-interest debt just because it’s cheaper than it used to be, but if you’re currently paying off credit-card debt and have ever considered consolidating it – i.e. taking out a personal loan at a lower rate and using the cash to pay off your balance – now is probably the right time to do it.
Loan-comparison site Credible reported that “the ‘spread’ between interest rates on credit cards and personal loans hit an all-time high during the third quarter of 2019.” In other words, there’s never been greater potential for saving money on interest.
Federal Reserve data shows that borrowers who were charged interest on their credit-card debt paid an average of 16.97% in the third quarter of 2019, Credible’s Matt Carter wrote. Meanwhile, the average rate on personal loans during that time was 10.07%. The difference of nearly seven percentage points represents the largest spread in more than 20 years of Federal Reserve records, Carter reported.
“Variable-rate credit cards are typically indexed to the prime rate, so when the Fed raises its target for the short-term federal funds rate, the prime rate usually follows,” Carter wrote. “But because investor demand for long-term debt has remained strong, rates on personal loans have been looking more and more attractive to qualified borrowers.”
But this method won’t work for everyone who is in debt – lenders weigh heavily a person’s credit score, granting the lowest rates to borrowers with a score 680 or above, according to data from Credible. And the shorter the loan repayment term – typically three years – the lower the interest rate offered by most lenders, Carter reported.
To find out how much borrowers in the best shape for consolidation could save, Credible analyzed 2,500 loans made through its marketplace in September. The site found that the typical borrower with a credit score between 720 to 779 took out a personal loan at a 7.25% interest rate and three-year repayment term to consolidate $15,000 worth of debt. Assuming the average credit-card interest rate of 16.75%, consolidation saves the borrower $2,500.
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