If you're worried about how to pay off your holiday credit card debt, here are the pros and cons of taking out a personal loan. 

If you're feeling a financial hangover after holiday shopping and have considered taking out a personal loan to pay off your credit card debt, you have a decision to make.

When I was young and struggling with a big decision, my mother would suggest I create a list of pros and cons. I'd get a piece of paper, draw a line down the middle, and on one side I'd write the positive things that could happen if I made a particular decision, and on the other I'd write the negative things that could result from that decision.

So, should you take out a loan to pay off holiday debt? Here's our list of pros and cons. Hopefully, it will help you decide.

Pros of taking out a personal loan

1. You may lower your interest rate

One of the main reasons for using a personal loan to consolidate your credit card debt is to access a lower interest rate. Make sure the interest rate on any personal loan you take out will be lower than the one you are paying on your credit card debt. 

2. You can simplify your bill payments

Say you have five different credit cards. Consolidating them through a single loan will streamline the bill payment process and make it less likely that you'll overlook a bill. Lenders also often offer an interest rate discount if you sign up for automatic payments, which is a double win. You'll pay less in interest and never have to worry about forgetting to make a payment.

3. It can improve your credit score

Taking out a personal loan can sometimes improve your credit score. Although you should never take on additional debt solely to improve your score, if it already makes sense to do so, this could be an added bonus.

One of the things credit bureaus look for is a mix of credit. The greater the variety of credit types, the higher your credit score. For example, it is better to be making on-time payments on an auto loan, a credit card, and a personal loan than on three credit cards. Mix of credit accounts for 10% of your FICO® Score. 

4. You may pay off your debt faster

It is possible you'll pay the debt off faster if you reduce your interest rate and don't commit to a lengthy repayment timeline. Make sure you read the loan terms carefully and sign up for an affordable monthly payment that does not increase the overall cost of your loan.

Cons of taking out a personal loan

1. Your interest rate is not guaranteed to be lower

Loan rates fluctuate and lenders have flexibility when it comes to setting those rates. As of today, the interest rates for personal loans range from 5.99% to 35.89%, depending on your credit score and the amount you need to borrow. The gulf between the two rates is massive.

To illustrate the difference, if you took out a $5,000 loan at 5% interest and paid it off in three years, your monthly payment would be $150 and you would pay $395 in interest over the life of the loan.

However, if you borrowed $5,000 at 35% interest, your payments would be $226 for three years, and you would end up paying around $3,142 in interest. 

If the interest rate you're offered on a personal loan is very close to the rate you're paying on credit cards, you may be better off sticking with the cards and paying them off as quickly as possible. 

2. You may be tempted to spend more money

If you borrow enough to pay back your credit card debt, it can be tempting to use the cards again and spend more. You may tell yourself that the pressures of the holidays caused you to rack up that debt, but you need to make a firm commitment not to spend more. If you don't take control of whatever made you depend on credit in the first place, you may find yourself with more credit card debt on top of your personal loan.

3. You increase your debt-to-income ratio

Taking out another type of loan is only beneficial if you keep your debt-to-income ratio (DTI) low. DTI refers to how much you owe in relation to how much you earn. Let's say your gross monthly income is $7,000 and total monthly debt payments amount to $3,500. Your DTI is found by dividing $3,500 by $7,000 to get .5 or 50%. 

The lower your DTI, the better. For example, most mortgage lenders prefer a DTI below 43%, and some want it to be below 36%

4. You may have to pay loan fees

Some personal loan companies charge an origination fee, which is usually a percentage of what you borrow. Origination fees range from 1% to 8% of your loan amount. For example, if you borrow $5,000, you may be charged a fee of $50 to $400. If you are counting on every dollar of that loan to pay off holiday debt, remember to factor in the fee and borrow accordingly. 

There is no doubt that the holidays can be wonderful, but debt is no fun. Weigh the pros and cons as they apply to your situation, do the math, and figure out which option works best for you. In the meantime, while you're paying off 2019 bills, you may want to make a plan to avoid more debt in 2020. 

Credit plays a big part, but it's not the only deciding factor.

You want to put your best foot forward when applying for a mortgage, auto loan, or personal loan, but this can be difficult to do when you're not sure what your lender is looking for. You may know that they usually look at your credit score, but that's not the only factor that banks and other financial institutions consider when deciding whether to work with you. Here are seven that you should be aware of.

1. Your credit

Nearly all lenders look at your credit score and report because it gives them insight into how you manage borrowed money. A poor credit history indicates an increased risk of default. This scares off many lenders because there's a chance they may not get back what they lent you.

Scores range from 300 to 850 with the two most popular credit-scoring models, the FICO® Score and the VantageScore, and the higher your score, the better. Lenders don't usually disclose minimum credit scores, in part because they consider your score in conjunction with the factors below. But if you want the best chance of success, aim for a score in the 700s or 800s.

2. Your income and employment history

Lenders want to know that you will be able to pay back what you borrow, and as such, they need to see that you have sufficient and consistent income. The income requirements vary based on the amount you borrow, but typically, if you're borrowing more money, lenders will need to see a higher income to feel confident that you can keep up with the payments. 

You'll also need to be able to demonstrate steady employment. Those who only work part of the year or self-employed individuals just getting their careers started may have a harder time getting a loan than those who work year-round for an established company.

3. Your debt-to-income ratio

Closely related to your income is your debt-to-income ratio. This looks at your monthly debt obligations as a percentage of your monthly income. Lenders like to see a low debt-to-income ratio, and if your ratio is greater than 43% -- so your debt payments take up no more than 43% of your income -- most mortgage lenders won’t accept you. 

You may still be able to get a loan with a debt-to-income ratio that's more than this amount if your income is reasonably high and your credit is good, but some lenders will turn you down rather than take the risk. Work to pay down your existing debt, if you have any, and get your debt-to-income ratio down to less than 43% before applying for a mortgage.

4. Value of your collateral

Collateral is something that you agree to give to the bank if you are not able to keep up with your loan payments. Loans that involve collateral are called secured loans while those without collateral are considered unsecured loans. Secured loans usually have lower interest rates than unsecured loans because the bank has a way to recoup its money if you do not pay.

The value of your collateral will also determine in part how much you can borrow. For example, when you buy a home, you cannot borrow more than the current value of the home. That's because the bank needs the assurance that it will be able to get back all of its money if you aren't able to keep up with your payments.

5. Size of down payment

Some loans require a down payment and the size of your down payment determines how much money you need to borrow. If, for example, you are buying a car, paying more up front means you won't need to borrow as much from the bank. In some cases, you can get a loan without a down payment or with a small down payment, but understand that you'll pay more in interest over the life of the loan if you go this route.

6. Liquid assets

Lenders like to see that you have some cash in a savings or money market account, or assets that you can easily turn into cash above and beyond the money you're using for your down payment. This reassures them that even if you experience a temporary setback, like the loss of a job, you'll still be able to keep up with your payments until you get back on your feet. If you don't have much cash saved up, you may have to pay a higher interest rate.

7. Loan term

Your financial circumstances may not change that much over the course of a year or two, but over the course of 10 or more years, it's possible that your situation could change a lot. Sometimes these changes are for the better, but if they're for the worse, they could impact your ability to pay back your loan. Lenders will usually feel more comfortable about lending you money for a shorter period of time because you're more likely to be able to pay back the loan in the near future.

A shorter loan term will also save you more money because you'll pay interest for fewer years. But you'll have a higher monthly payment, and so you must weigh this when deciding which loan term is right for you.

Understanding the factors that lenders consider when evaluating loan applications can help you increase your odds of success. If you think any of the above factors may hurt your chance of approval, take steps to improve them before you apply.

Any loan you cosign on could become a thorn in your side.

While the consensus from financial experts is that you shouldn't cosign on a loan, people still wrestle with this decision. They consider cosigning other people's personal loans, auto loans, or, in extreme cases, even mortgages.

If you're in this situation, you may already know the obvious risks. You're responsible for the loan you cosign, and any missed payments or other repayment issues can affect your credit score. But perhaps you're confident that the borrower will pay, so you figure there's nothing to worry about. Although this is dangerous logic to use, let's assume you're correct.

The problem is that even if the borrower makes all the payments on time and does everything right, being a cosigner on a loan could still come back to bite you. That's because that loan will be considered your debt, so it could prevent you from borrowing money in the future. Here's why.

Cosigning increases your debt-to-income ratio

When you cosign on a loan, it's tied to you. For all intents and purposes, it's as if you applied for the loan and borrowed that money. One reason that's important is because it increases your debt-to-income (DTI) ratio.

Your DTI ratio is your monthly debt payments divided by your gross income. For example, let's say you earn $5,000 per month. The payments on your credit cards, student loans, and other debt add up to $1,000 per month. You would have a DTI ratio of 0.20, which would more commonly be expressed as 20%.

Then, a friend of yours asks you to cosign on a personal loan with payments of $900 per month. Even if your friend is making every payment, it will still add $900 per month to your total monthly debt payments. That will push your DTI ratio up to 38%.

How a higher DTI ratio affects you financially

A higher DTI ratio may not initially seem like a big deal. If the borrower is paying, does it matter that your DTI ratio has increased?

To lenders, it does. Any time you apply for a loan, line of credit, mortgage or a credit card, the lender is going to review your DTI ratio to evaluate the risk of lending you money. If your DTI ratio is too high, the lender could deny your application.

Although there's no set cutoff point when it comes to DTI ratios, there are common guidelines used by mortgage lenders. You have a better chance of approval when applying for a mortgage if your DTI ratio, including your projected mortgage payment, is no greater than 36%.

Let's go back to the example above, where you cosign on a friend's loan and raise your DTI ratio from 20% to 38%. If you want to buy a house in the future, cosigning on that loan could be the difference between whether the mortgage lender approves or denies your application.

The same is true with any type of new credit account you want to open. It becomes more difficult to get approved as your DTI ratio increases.

Does cosigning on a loan ever make sense?

Cosigning on a loan is a high-risk, no-reward situation for you. The worst-case scenario is that the borrower doesn't pay. As you're responsible for the debt, you will suffer a credit score drop that could take years to fix. Even in the best-case scenario, you'll have a higher DTI ratio, and that could limit your own financial opportunities. The only person who stands to benefit is the person asking you to cosign.

The smart approach is to politely decline these requests. You can give advice on how to raise their credit or boost their loan approval odds, but you shouldn't put your financial stability in someone else's hands.

When it comes to taking out a loan, interest rates and terms make all the difference. Don't be fooled by monthly payments -- what matters is the total cost 

We humans do strange things. We hit the elevator button several times, believing it will speed up the process. We check for bad guys hiding in the closet and behind the shower curtain as soon as we enter a hotel room. And we worry more about our monthly payments than the total amount a loan will cost.

That last one is straight-up silly. Paying more than necessary for a loan is like throwing money into a fire and watching it burn.

The new car

Loan terms matter, no matter what you're shopping for. For purposes of illustration, let's say you're on the hunt for a new car and fall in love with one in a dealer's lot. The salesperson mentions the price and you swallow back your surprise. It's several thousand dollars more than your cool-headed research from home told you it should be. 

The salesperson insists that the number you've run across online is the manufacturer's suggested retail price -- and that demand for this particular model is so high that people are willing to pay much more.

You wisely turn to leave, but the salesperson stops you and asks what your ideal monthly payment would be. You are invited to have a cup of coffee while the salesperson speaks with the finance department. A few minutes later, miracle of miracles, you're informed that the dealership wants your business so much that they're willing to offer you special financing. In fact, they've crunched the numbers and were able to "get close" to your desired monthly payment.

By now, you've imagined driving the car off the lot and are emotionally committed. You don't worry that the annual percentage rate (APR) the dealership offers is 1% higher than you expected. How much damage can 1% do? 

They also tell you that you'll need to stretch the loan out over 72 months in order to keep your payment down. You were hoping for 60 months, but decide you can live with a longer loan. 

You want that car so much that you agree to terms without crunching the numbers and without thinking about how much you will pay in total. 

The difference a percentage point makes

Take a look at these comparisons of different interest rates on a 60-month and 72-month auto loan for a $36,000 car. If you take out an auto loan for 6% over a 60-month period, you'll pay a total of $41,759 -- with $5,759 in interest charges over the course of the loan. 

But if you agree to 7% instead, you'd pay an additional $1,012 in interest. And, if you extend that same loan for an extra year at the higher rate, you might lower your monthly payments, but you'd pay a total of $44,191. That's almost $2,500 more than the total cost of the five-year loan at 6%.

Charts like these might help you walk away from bad deals. Each shows how much more a single percentage point will cost you over the life of a loan. 

60-month loan

Data source: Author calculations.

72-month loan

Data source: Author calculations.

Understand your loan terms

No matter what you're shopping for -- whether it's a home, refrigerator, lawnmower, or new credit card -- interest rates matter. Agreeing to pay a single percentage point more in interest is like allowing the bank to siphon extra money from your account each month. 

One surefire way to avoid bad deals is to always ensure you understand the loan repayment terms and to keep an eye on the total cost rather than the monthly one. Another is to get your credit score so high that lenders compete for your business by offering the lowest possible interest rates. 

People with very poor credit scores may not get approved for loans at all, whereas those with very good or exceptional scores will qualify for better rates from lenders and more credit card perks or rewards.

Boosting your credit can save you money. There are lots of ways to improve your score, but ultimately it comes down to paying your bills on time and minimizing the amount of debt you carry. And whatever your score, don't forget that you always have the power to walk away from a bad deal.

We're all human. We'll continue to self-diagnose based on the latest Google search results. We'll still touch a plate the second a server warns us it's hot. And we'll still make financial mistakes. What makes us smart humans is correcting those mistakes so that next time, we can get it right.