One significant advantage of a personal loan is that you can use it for almost anything. It comes in handy when pursuing a home improvement project, purchasing a major appliance or planning a vacation. Another acceptable use for personal loans is paying off credit card debt.
Key Takeaways
Paying off credit card debt with a personal loan has multiple advantages. These include lower interest rates, dealing with a single payment and boosting your credit score.
Finding the best personal loan involves taking note of several factors, such as interest rates, repayment terms, loan amounts and loan fees.
A personal loan isn’t the best choice for everyone. If you want alternatives, you can explore balance transfer cards or home equity lines of credit.
Credit cards often have high interest rates, and these can cause your balance to balloon quickly over time. To prevent this, you can roll several credit card debts into one loan, making it easier (and often cheaper) to pay off.
However, it’s smart to consider whether paying off your credit card debt with a personal loan is your best option. Although there are several benefits, this approach also involves some risks. Exploring both sides can help you determine if it’s the right option for you.
Benefits of Paying off Credit Card Debt With a Personal Loan
There’s a reason why many consumers consider paying off credit card debts with a personal loan. This method provides several benefits that significantly affect your finances, such as spending less on interest and improving your credit score. MoneyGeek’s guide details these for you.
H5. Lower Interest Rates
One area you should always look at is interest rates. Credit cards typically have higher interest rates than personal loans. Based on the Federal Reserve’s data for 2021, the average interest rate for credit cards is 16.45%. You may pay an average interest rate of 9.38% for a 2-year personal loan. That is a significant difference.
Your interest rate is the factor that impacts your finances the most, which is why MoneyGeek encourages shopping around for quotes before finally deciding on a lender or a credit card provider. Managing your finances becomes more challenging the higher your interest becomes.
Streamlined Single Payments
When managing your finances, the actual payments are only one area you must consistently watch. There’s a lot of administrative work that goes behind the scenes.
The average American has three to four credit cards at any time. That means keeping track of four different amounts with four due dates. When you try to keep this much information straight, it’s easy for something to fall through the cracks. Missed payments result in penalty fees and a drop in your credit score.
A personal loan can save you a lot of time and effort. You can use the proceeds to pay off your credit card debt, leaving you with only one financial obligation to fulfill, one balance and one due date. It makes managing your finances (and your time) easier.
Faster Debt Management
Your monthly credit card statement indicates the minimum allowable payment you can make. However, if you limit yourself to this amount, it could take you years to pay your balance off.
Using a personal loan to pay credit card debt may be more efficient in the long run. You can use the proceeds to cover all your credit card bills simultaneously. It’s an excellent strategy because it saves you from spending more on interest.
Now you only have one debt to work on, and you can set up a repayment plan. Your loan terms may depend on your loan amount and lender, but it provides some flexibility.
Improved Credit Score
Not only does a personal loan help you pay off your credit card debt, but it can also boost your credit score. Your credit standing affects things like the interest rates lenders offer and you car insurance premiums. The higher your credit score, the better the offers you’ll find.
Personal loans can help increase your credit mix, which makes up 10% of your credit score computation. It refers to the diversity of your credit, so if you’ve been using credit cards most of the time, a personal loan can show that you can manage different types of debt.
Paying off your credit card debt with a personal loan can reduce your credit utilization ratio, which is how much of your credit you’ve used. You’ll establish a positive payment history if you consistently pay your loan on time and in full. These make up 30% and 35% of your credit calculation, respectively.
Paying off your credit card debt is only one aspect of debt management. You can use other strategies to avoid challenging financial situations, including the following:
- Decide on a payment approach for your credit card debt. Applying pay-down strategies can help you design a structured process if you need to pay off balances on multiple cards.
- Manage your spending. Paying off your credit card debt won’t do much good if you rack it up again.
- Seek credit counseling if you need professional help.
- Consider debt consolidation.
Drawbacks of Paying off Credit Card Debt With a Personal Loan
Despite the many advantages of paying off your credit card debt with personal loans, it’s crucial to understand that it’s not entirely risk-free. There are several disadvantages to this move, and you must consider them before deciding whether or not to pursue a personal loan application.
Adds Another Debt
Have you ever heard of the statement, “Paying off debt with debt”? That’s the logic behind paying off your credit card debt with a personal loan. Although you can use the proceeds to pay off your credit card balances, it doesn't eliminate debt.
A personal loan might have lower interest rates, but you are committing to monthly payments for the next two to five years. No matter how much you borrowed, a personal loan is a commitment. You’ll need to build it into your household budget.
You also need to watch your spending habits because if you’re not careful, you might end up with more debt than you initially had. It’s tempting to use your credit cards again if you’ve cleared your balances, but this can return you to the same place you started, except this time, you also have a personal loan to pay off.
Fees May Be Involved
The monthly payment is the most significant figure for most personal loan borrowers. That’s understandable — after all, it’s how much you need to spend each month. However, it’s not the only number you should consider.
Personal loans often have fees, which are easy to overlook. Unfortunately, these may impact your finances despite being less significant than the loan amount. Origination fees may reduce your proceeds, and prepayment penalties may keep you from paying off your debt earlier, even if you have the means to do so.
Fortunately, it’s easy to avoid unforeseen expenses and fees. Be sure to read through your loan agreement before signing. If, after reading, you’re still unclear about the costs, don’t hesitate to contact your lender. They’re in the best position to explain all possible fees to you.
Uncontrolled Spending Behavior
Using credit cards becomes a habit when you use them for most purchases. Breaking out of this can be challenging, especially if you’re not used to using other channels. That’s not to say you should never use your cards again, but you’ll want to be more mindful of your spending.
You can avoid carrying balances on your credit card if you avoid using it for significant purchases. You can pay it on time and in full each month. Being more aware of your spending habits can go a long way to helping you manage your credit card debt.
Lower Interest Isn’t Guaranteed
Compared to the average interest rates of credit cards, those of personal loans can be significantly lower. That’s the general trend, but it’s not a 100% guarantee.
Lenders charge varying interest rates depending on your profile. They consider several factors, which include your credit score. One of two things could happen if you have a bad credit history or poor credit standing.
On the one hand, the lender may deny your loan application. On the other, they may approve your application but will offer higher-than-normal APRs, which result in higher monthly payments.
With the latter, you may want to examine how this affects your finances. Even if you only have a 24-month loan term, you’ll have to deal with potentially more expensive monthly payments for the next two years.
If, after looking through the pros and cons, you feel that paying off your credit card debt with a personal loan is your best option, the next step is to ensure you find the right one. The following areas can help you compare offers from different lenders:
- Interest rates
- Possible repayment terms
- Minimum and maximum loan amounts
- Applicable loan fees
How to Get a Personal Loan to Pay off Credit Card Debt
You can use a personal loan to pay off credit card debt, and it’s smart to understand how to go about it if you feel it’s a solid option. MoneyGeek’s guide walks you through the various steps involved.
Determine the amount you need
Add up the balances of the credit cards you intend to pay off using a personal loan. It’s good practice to borrow just enough to cover your debt, but having a slight buffer is also a good idea. It may come in handy if you end up with a lender that charges an origination fee.
Shop around for lenders and offers
You may have a lender in mind from the get-go, but don’t pass up the opportunity to compare lenders. Some lenders may offer better rates for the same loan amount and repayment terms. Knowing these can help you find the best deal for your needs.
Get prequalified for a personal loan
Not all lenders have a prequalification process. But if you find one that does, going through the process is an excellent strategy. Most use a soft inquiry and won’t affect your credit score. It’ll also give you an idea of your interest rate and how much you’ll need to pay each month.
Accept an offer and apply
If you prequalify for a personal loan, the lender will show you the different offers available to your profile. Take the time to review these, including the fine print. It’s also crucial to check whether there are any fees, such as origination and prepayment.
Once you’ve gone through the information, choose the best offer that works for you and complete the application process.
Use the proceeds to pay off credit card debt
When the funds come in, use them to pay off your credit card balances.
The amount of time before you receive your funds depends on your lender. For example, in some situations, you can get your proceeds from a lender the same day. Other lenders can take three days or longer to disburse funds.
Control or avoid the use of credit cards
After settling your balances, mindful use of your credit card can prevent the same situation from happening again. Remember, if you need to use them, try to stick to small purchases that you can pay off in full each month.
Develop a solid plan to pay off the personal loan
Now that you’ve sorted out your credit card debt, you can focus your effort on paying off your personal loan. Don’t forget to build it in your budget to see if you need to adjust your variable expenses in other areas.
Make sure you have enough per month to pay for your dues. If your lender doesn’t charge a prepayment, you can make more payments if your financial situation allows it. This can help you pay off your loan faster.
Alternative Solutions to Paying off Credit Card Debt
Paying off your credit card debt with a personal loan is a solid strategy, but it’s not for everyone. If your financial situation isn’t ideal or you have other financial obligations besides credit card balances, adding a new debt might not be the best move. Fortunately, there's more than one strategy you can use.
Using a balance transfer card follows the same logic as a personal loan. You can transfer your balances to a card and for the best possible outcome, try to find one with a 0% interest rate during its introductory period.
However, you’ll need a good credit score to qualify for this, and you can’t apply for one from an issuer where you’re already carrying a balance. MoneyGeek’s guide on the best balance transfer cards can help you find one that fits your needs.
These are two of the most popular debt payment strategies. Both require you to arrange your debt, but each uses a different factor.
For the Debt Snowball, you first pay off the card with the smallest balance. It allows you to experience small wins quickly, which sustains motivation. However, it may take you longer to pay off everything.
The Debt Avalanche instructs you to prioritize the debt with the highest interest rate. It may take more time before you see the fruits of your labor, but once you settle the first one, the rest become less challenging.
A debt settlement company offers to settle, renegotiate or change the terms of your original debt. Although having a third-party company intercede may seem like a good idea, there are risks associated with this option.
Debt settlement services often require you to pay expensive fees. They also encourage you to stop paying your balances while negotiations are underway, which may result in late fees and penalties.
This option is always available to you, but you should explore other alternatives before this one.
A HELOC is an excellent option if you’ve built a lot of equity in your home. You can do this by putting in a higher down payment, refinancing and shortening your mortgage and investing in remodeling your home.
Home equity loans typically have lower interest rates than credit cards and personal loans. However, remember that it’s a secured loan, and your home is what you put up as collateral. So if you can’t pay your debt, you’ll risk losing your house.
Frequently Asked Questions About Credit Card Debt
Paying off credit card debt with a personal loan is always an option, but consumers usually have questions about it. MoneyGeek’s guide includes information on the most requested topics.
sources
- Federal Reserve. "Consumer Credit — G.19." Accessed June 11, 2022.
- Experian. "What its the Average Number of Credit Card per US Consumer?." Accessed June 10, 2022.
- Debt.org. "Balance Transfer Credit Cards." Accessed June 12, 2022.
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