Should You Use a Personal Loan To Pay Off Credit Cards?
Debt consolidation is a common way people use personal loans. This involves taking out a personal loan, then using the money from the loan to pay off outstanding credit card balances. This leaves you with a single fixed monthly payment, often at a lower interest rate — meaning you may pay less in interest and pay off your debt more quickly.
Using a personal loan to pay off credit cards can be a smart move. But it’s crucial to consider a few things before deciding to do so.
- Compare the interest rates: If the personal loan interest rate is significantly lower than your credit card interest rate, it could save you money in the long run. But if they’re about the same, securing a personal loan for such purposes might not be worth it once you factor in the loan’s fees.
- Consider your total debt: If your credit card debt feels overwhelming and you’re struggling to stay on top of multiple monthly payments, a personal loan can provide a consolidated and more manageable way to pay off your debt.
- Assess your financial stability: Taking on any form of debt, even if it’s a personal loan to consolidate your credit cards, is a significant financial decision. Make sure you’ll be able to make the monthly loan payments consistently to avoid hurting your credit.
One major potential drawback of taking out a personal loan for debt consolidation is that you have the potential to make purchases on your cards again once they’re paid off. This could trap you in a cycle of debt. If you’re unsure what to do, consider consulting a credit counselor who can review your situation and tell you whether using a personal loan to pay off credit card debt is the wise choice.
>> Related: Learn more about the best personal loans
When Does Using a Personal Loan To Pay Off Credit Cards Make Sense?
Using a personal loan to pay off credit cards can be a smart financial move in certain situations. For instance, if you have high-interest credit cards, you’re likely paying a lot in interest charges each month. A personal loan can help you consolidate your debt into a single, lower-interest loan, which may save you money in the long run.
Likewise, if you have multiple credit cards with balances, it can be overwhelming to keep track of them all. Getting a debt consolidation loan can simplify your credit card payments and make it easier to manage your finances.
Personal loans also generally have fixed interest rates, which means your monthly payment is the same no matter what. So if you’re concerned about falling behind on your credit cards due to unpredictable payments, a personal loan can help you get back on track.
Using a Personal Loan To Pay Off Credit Cards
Say you have $10,000 in credit card debt spread across three cards, each with a 20% interest rate. Your minimum monthly payment across all cards is $300. If you only make the minimum payments, it would take you over 19 years to eliminate your loan debt. During that time, you’d pay a total of $21,850, including interest.
Now, let’s say you consolidated that $10,000 in credit card debt into a personal loan with a 10% interest rate and a five-year term. Your monthly payment would be around $212 (approximately $78 cheaper per month). But you’d get rid of your loan debt in five years, and you’d pay $12,748 total, including interest.
By consolidating your debt into a personal loan, you’d pay it off nearly 15 years sooner and save more than $9,000 in interest.
>> Related: Learn more about personal loans vs. credit cards
Pros and Cons of Using a Personal Loan To Pay Off Credit Cards
Using a personal loan to pay off credit cards can aid you in becoming debt-free. But weigh the pros and cons before making a decision.
Pros
Potentially lower interest rates: Personal loan interest rates are often lower than credit card interest rates, which can save you money on interest charges over time.
Simplified payments: Consolidating your credit card debt with a personal loan can simplify your payments and make it easier to manage your finances.
Fixed repayment schedule: Personal loans generally have a fixed repayment schedule, which can help you budget and predict payments.
Potential credit score boost: If you make on-time payments on your personal loan, it can help improve your credit score over time. Your credit utilization ratio may also decrease, which can have further positive impact on your credit score.
Cons
Requires good credit: To get a personal loan with the best terms, you typically need a good credit score. If your credit isn’t strong, you might get denied for a loan or face higher interest rates.
Possible fees: Some personal loans may come with origination fees, prepayment penalties or other lender fees that can add to the cost of borrowing.
Risk of further debt: Clearing your credit card balance might tempt you to use those cards again, potentially leading to even more debt than before.
>> Related: Learn more about the pros and cons of personal loans
Key Considerations When Choosing a Personal Loan
Before you sign on the dotted line for a personal loan, it can help to consider the following steps.
Compare Interest Rates
When shopping around and comparing personal loan offers, among the first things to assess are interest rates.
Personal loan interest rates depend on the lender and your credit profile. Generally, borrowers with good credit scores qualify for the lowest interest rates. Interest rates are typically expressed as an annual percentage rate (APR), which includes both the loan rate and any fees associated with it.
Even a small difference in loan rates can significantly affect the total amount you repay. So look for loans with low interest rates and compare the APR to see the total sum you could be expected to pay.
Review the Fees
Personal loan fees can include origination fees, prepayment penalties and late payment fees.
- Origination fees: These are a percentage of your loan amount. They’re deducted from your loan balance before it’s deposited in your checking account.
- Prepayment penalties: If you pay off your personal loan early, such fees may get charged.
- Late payment fees: These costs are added on by your loan provider if you have missed payments or make a payment after the due date.
Pick the Right Repayment Term
Personal loan terms can last anywhere from a few months to several years. The term of the loan will affect your monthly payment amount and the total amount of interest you’ll pay over the life of the loan. Choosing a longer loan term will lower your monthly payment, but it also means you’ll end up paying more interest over time.
Consider Repayment Flexibility
Look for a lender that provides flexible repayment options, such as the ability to make extra payments, change your payment due date or defer payments due to financial hardships. Having flexibility can help you manage unexpected changes in your financial situation and avoid late fees that could ultimately hurt your credit.
Look for Good Customer Support
It can be beneficial to choose a lender that has a good reputation for customer service and support. It’s important to be able to get in touch with someone should you have questions or concerns about your loan.
One way to judge the level of customer support you’ll receive is to call up a lender and ask them questions before you take out a personal loan.
How long were you on hold? How responsive was the customer service agent with whom you spoke? How was the overall experience? These are good questions to think about as you look for a personal loan provider with good customer service.
You can also go to trusted sites like the Better Business Bureau (BBB) and Trustpilot to read customer reviews about the company you’re considering.
Use This Checklist To Evaluate Personal Loan Lenders
Here’s a step-by-step checklist you can use to evaluate lenders and find a personal loan that fits your budget:
- Determine how much you need to borrow: Before you start looking for lenders, determine how much money you need to borrow. This can help you narrow down your search and find lenders that offer loans in the amount you require.
- Check your credit score: Your credit score is a significant factor that determines the interest rate and loan terms for which you qualify. Grab a free copy of your credit report from Equifax, Experian and TransUnion (the three major credit bureaus), and use it to check your credit history and score.
- Get preapproved: Getting preapproved for a personal loan can help you see what interest rate and terms you qualify for. This can help you narrow down your search and find the best personal loan for your needs.
- Read the fine print: Read the loan agreement carefully to understand the interest rate, fees and repayment terms. Make sure you understand the total cost of the loan and any penalties for late payments or early repayment.
- Apply for the loan: Once you have found a lender that meets your needs, fill out the loan application and provide any required documentation. You’ll likely need to show proof of income and verify your identity.
- Review the loan offer: After you apply for the loan, the lender provides you with a loan offer. Review the offer carefully to ensure that it meets your needs and that you understand the terms.
- Accept the loan: If you’re satisfied with the loan offer, accept the loan and sign the loan agreement.
- Repay the loan: Once you’ve accepted your loan, you will start to make payments. You can manually submit your payments each month or set up auto-pay to ensure your bill is paid on time. That way, you avoid late fees.
If you need help with this process, you can consider contacting a nonprofit credit counseling agency that can help you create a realistic plan to pay off your debt.
>> Related: Learn more about personal loan requirements
The Bottom Line
Using a personal loan to pay off credit card debt can have several benefits. Personal loans typically have lower interest rates than credit cards, which can help you save money on interest charges and pay off your debt more quickly. Additionally, personal loans usually come with fixed repayment plans, which may help you stay on track with your payments and avoid accumulating more debt.
However, personal loans can include strict eligibility requirements and fees, and you could run the risk of taking on more debt if you continue to use your credit cards.
If you’re thinking about applying for a personal loan, evaluate your overall financial situation and talk to a professional if necessary. A credit counselor can help you understand your options and create a debt management plan that aids you in becoming debt-free. Shop around and compare loan offers from different lenders to find the best overall value. Be sure to read the fine print and that you understand all the fees and terms associated with the loan before accepting and committing to it.
Frequently Asked Questions About Personal Loans To Pay Off Credit Cards
Generally, you can use a personal loan to pay off credit card debt. It typically has lower rates and a fixed monthly payment that can help you pay your debt off sooner compared to making minimum payments on all your cards. But personal loans aren’t your only option for paying off credit card debt. You can also use a balance transfer credit card, home equity loan or home equity line of credit (HELOC). The right choice for you will depend on your individual financial circ*mstances.
Online lenders, major banks and credit unions are all good places to start your personal loan search. You’ll qualify for the lowest rates if you have excellent credit and a good credit history, but don’t let that stop you from researching your options. Even if you have bad credit, you still may qualify for a personal loan.
In most cases, you do not need to put up collateral to take out a personal loan. The only exception is if you’re taking out a secured loan. In that case, you might need to use your car, house or other assets to get approved for the loan.
You can use several strategies to pay off credit cards. Generally, you can start by creating a budget to track your expenses and identify areas to cut back. It can help to pay more than the minimum on high-interest cards while making minimum payments on others. You can use the debt snowball method or debt avalanche method to figure out which card to focus on first. You can also explore options like a debt consolidation loan.
You may have options for negotiating with creditors for a debt settlement or repayment plan. However, complete forgiveness is uncommon, and debt settlement may negatively impact your credit score and involve tax implications. Bankruptcy is a last resort option that might discharge credit card debt, but it can also have significant impacts on your credit score and financial future. Consult a credit counselor before pursuing any of these options.
A credit card forgiveness program is an arrangement where credit card companies might agree to reduce a portion of your outstanding debt. This generally occurs when you’re facing extreme financial hardship or can’t make payments. However, participating in such programs can negatively affect your credit score and may involve fees. Carefully consider the consequences and explore other options before entering into a credit card forgiveness program.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team ateditors@marketwatchguides.com.
Cassidy HortonContributing Writer
Cassidy Horton is a finance writer with over five years of experience. She holds an MBA and a bachelor’s in public relations from Georgia Southern University and has worked with top finance brands like Forbes Advisor, NerdWallet and Consumer Affairs.
Andrew DunnSenior Editor
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
