Should You Use a Personal Loan to Pay Off Credit Cards?
Using a personal loan to pay off credit cards can be a savvy financial move for many people who are looking to consolidate debt. Still, it’s not the only option out there for consolidation, and it may not be right for everyone. If you’re thinking of going this route, here’s what you need to know before getting started.
Should you use a personal loan to pay off credit cards?
Ultimately, there’s no one-size-fits-all answer to the question of whether you should get a personal loan. For some people, it can be a way to streamline their debt payments and secure a lower interest rate, which ultimately makes repayment simpler and more affordable.
However, for others, the upfront fees associated with personal loans may be a discouragement, or there may be better options available. (More on that below.) It’s up to you to weigh the pros and cons of this decision and come up with the best answer for you.
Here are some factors to weigh as you decide.
4 times when using a personal loan to pay off credit cards makes sense
These are times when paying off debt with a personal loan can be a smart move. Let’s take a look at four times when it may make sense to use a personal loan for refinancing credit card debt:
You qualify for a better interest rate
As a rule of thumb, personal loans tend to have lower interest rates than credit cards. Plus, if you’re juggling multiple high-interest credit card balances, you’re probably paying a significant amount in interest charges each month. However, if you take out a debt consolidation loan and use it to pay off your existing credit card balances, you can help yourself save on interest in two ways:
- You’ll be consolidating multiple payments into one, so you will only be facing one set of interest charges on a monthly basis.
- Depending on your credit score, you may be able to secure a lower interest rate than you currently have on your credit card accounts.
You want to streamline multiple debts into one payment
When you’re juggling several credit cards, each with its own due date and minimum payment amount, managing your repayment schedule can quickly get confusing. It can be easy to mix up two payments, or worse, miss a payment entirely.
However, if you use a personal loan to pay off your credit card debts, you can streamline your payments into one. One payment will likely be easier to keep track of on a regular basis and, if you’re able to secure a lower annual percentage rate (APR) on your new loan, you may even be able to begin chipping away at your debt even faster.
You need to lower your monthly payment
Taking out a personal loan also comes with the opportunity to choose your own loan term, or the length of time that you have to repay your loan balance. Typically, longer loan terms come with lower monthly payments, but they also tend to bring more interest charges. Shorter loan terms, on the other hand, can help you save on interest but usually have higher monthly payments.
If you need to decrease the amount of money you’re putting toward your debts each month, choosing a long-term personal loan could be a good option. Extending your loan term can help lower your monthly payment, especially if you’re able to secure a lower interest rate at the same time.
You want to know when you’ll be debt-free
One major drawback to credit cards is that it can be difficult to know when your debt will be paid off in full, especially if you keep using them. In contrast, a major benefit of a personal loan is that it comes with a fixed repayment schedule. You’ll know exactly how much you owe each month and exactly when you’ll officially become debt-free.
3 times when using a personal loan to pay off credit cards might not make sense
At the same time, there are a few instances where the benefits of using a personal loan to pay off credit cards may not outweigh the disadvantages. Here’s a look at three times when you may want to consider taking another approach.
You only have a small amount of debt
While small personal loans do exist, they may not be the best option when you’re only dealing with a little debt. Put simply, personal loans always come with interest charges, and in some cases, they may come with upfront fees, as well.
If you’re only dealing with a small amount of debt, it may be worth looking into some alternative options that let you skip these added costs. For example, while a balance transfer credit card does come with an upfront fee, it can help you pay off your existing balances without paying interest charges. Meanwhile, using the debt snowball or debt avalanche method is completely free.
You’re planning on keeping up the same spending habits
Odds are, if you have a substantial amount of credit card debt, you may need to work on your spending habits. While consolidating credit card debt can help make your payments more manageable, it won’t stop you from accruing more debt if you keep spending in the same way.
With that in mind, it’s crucial to take a look at how you spend money before you decide to restructure your debts. Revisit your current budgeting methods, and consider hiring a financial professional to help you build better habits.
Your level of debt feels unmanageable
Finally, if you feel like you’re drowning in debt, you may need more help than a personal loan can offer. At this point, you may want to consider debt relief options instead. An accredited credit counselor, for example, can help you take stock of your finances and potentially work toward creating a debt management plan or debt settlement.
You could also consider filing for bankruptcy as a last resort. While bankruptcy comes in a few different forms, it ultimately helps you get rid of your debt without having to pay back everything that you owe. However, it severely damages your credit score for a number of years, so it should only be considered as a last resort.
Using a personal loan to pay off credit cards example
Let’s say you currently have $10,000 of credit card debt spread across three cards, each with a 25% interest rate. Every month, you make $400 worth of minimum payments in total. By following your current plan, it would take you approximately 5.3 years to pay off your debt, and you would pay a total of $6,417 in interest.
However, if you were able to consolidate that debt into a 36-month personal loan with a 7.5% interest rate, you could pay off the loan in three years and pay just $1,197 in interest charges. All told, that’s a savings of $5,219 in interest payments and just over two years’ time.
Pros and cons of using a personal loan to pay off credit cards
Before taking out a personal loan for debt consolidation, it’s important to weigh the pros and cons. Here they are for your consideration.
| Pros | Cons |
|---|---|
Potential to lower your interest rate: Personal loans typically have lower interest rates than credit cards, which can help you save money over time. Ability to streamline your payments: Consolidating your debt allows you to combine multiple payments into one, which can make staying on top of your payment schedule much easier. Comes with a fixed repayment schedule: Personal loans come with fixed payments and a set repayment schedule, making them much easier to budget around. Can boost your credit score: If you consistently make your payments on time, taking out a personal loan can actually help improve your credit score over time. | Bad credit borrowers may pay more: Bad credit loans do exist, but you’ll likely get charged a higher APR if you have a lower credit score. Some lenders charge added fees: Some personal loans come with fees, like origination fees or prepayment penalties, which can add to your total cost. Doesn’t change spending habits: Consolidating debt won’t stop you from taking on new debt if you have trouble keeping track of your spending. |
How to compare personal loan lenders
Now that you have a better idea of whether taking out a personal loan to pay off credit card debt is the right decision for you, let’s consider how to compare loan offers.
- Loan amounts: Each lender offers its own loan amounts. Be sure you’re going with a lender that offers a debt consolidation loan amount that’s large enough to meet your needs. If you’re unsure how much you need to borrow, use a calculator to add up all of your existing credit card balances.
- APR: The APR is a measure of the total cost of the loan, including the interest rate and any fees. Typically, the borrowers with the highest credit scores are able to secure the lowest rates. If you have a lower credit score and need a bad credit loan, you can usually expect to pay a higher rate.
- Added fees: Some lenders charge added fees on their loans, such as origination fees or prepayment penalties. If this is a dealbreaker for you, check out our list of fee-free personal loans instead.
- Repayment terms: In general, longer repayment terms mean a lower monthly payment, but come with more interest charges over the life of the loan. For their part, short-term loans typically have higher monthly payments, but you’ll save on interest over the life of the loan.
- Funding times: Some lenders have the capacity to offer quick loans or even have the capacity to provide same-day funding. Others may need a few days to complete your request. Make sure the lender’s anticipated funding time works in your schedule.
- Lender perks: Lenders will occasionally offer supplemental perks — like the ability to pay your creditors directly in the case of a debt consolidation loan. If that’s something you’re interested in having a lender do for you, you may want to seek out a lender that has that capability.
How to get a personal loan
Personal loans are available through banks, credit unions and online lenders. But, no matter which option you choose, the process of applying for a personal loan will be largely the same.
- Evaluate your need: The first step in this process is to evaluate how much you need to borrow. Start by adding up all your existing balances to see how much you need to cover your current debts. Then use our debt consolidation calculator to learn how your loan amount will impact your monthly budget.
- Check your credit score: Every lender sets its own personal loan requirements, and your credit score is often the single biggest determining factor of whether or not you’ll qualify for a loan. Typically, those with higher scores have better chances of being approved. Use LendingTree Spring to check your score and get suggestions on how to improve it, if needed.
- Shop around for a loan: Many lenders will let you prequalify for a loan without impacting your credit score. Collecting loan offers from multiple lenders can help you land the loan terms that work best for you and may even help you save money. Be sure to give each lender the same information for an apples-to-apples comparison.
- Apply for the loan: Once you’ve reviewed your loan offers and chosen the best one for you, the next step is to apply for a loan. You may need to fill out an application online or over the phone. You may also be asked to submit additional documentation, like pay stubs, before you get a final approval decision.
- Sign off on the loan: After you’ve received loan approval, you’ll be given a chance to review your loan terms. Make sure to read over the loan agreement carefully so you know what will be expected of you. If you agree with the terms, you can sign on the dotted line to accept the loan.
- Pay off your existing balances: As soon as your new loan funds hit your bank account, you can use them to pay off your existing credit card debts. Do your best to get confirmation that each of your balances has been paid in full and check your spending so that you don’t take on more debt.
- Start repaying your debt consolidation loan: Remember to start paying back your debt consolidation loan by its due date. Make repaying the loan a habit until you’ve achieved a zero balance.
6 personal loan alternatives
If you decide that using a personal loan to pay off credit cards is not the right choice for you, here are six other options to consider.
- Balance transfer credit card: If you have a small amount of debt that you think you can pay off relatively quickly, consider a balance transfer card with 0% APR. They allow you to pay off balances without interest for a limited time. You’ll need good or excellent credit to qualify and, if you can’t pay off your balance before the introductory period ends, you may face higher interest rates than you would otherwise.
- Home equity loan or HELOC: Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the equity you’ve built up in your property. They often come with high loan limits and low interest rates, but these loans are secured by your home, so you can lose your house if you miss payments.
- 401(k) loan: As the name suggests, a 401(k) loan allows you to borrow against your retirement plan and pay yourself back with interest. As long as you stay on top of payments, 401(k) loans aren’t taxed, and you’ll generally have five years to repay what you’ve borrowed. But, if you leave your company sooner, you’ll likely be forced to pay back the full loan right away.
- Debt restructuring: Sometimes your credit card issuer can help you make your payments more manageable by restructuring your debt. This is often done by deferring some payments to the end of your loan or by modifying your loan terms. However, it won’t change the total amount that you owe.
- Credit counseling: Credit counseling is designed to help you learn to improve your overall financial health. A credit counselor can help you institute debt repayment strategies, such as a debt management plan, which allows you to pay back your creditors over time. Unfortunately, not all credit counselors are reputable, so be sure to choose one that’s endorsed by the National Foundation for Credit Counseling (NFCC).
- Debt snowball method or debt avalanche method: There are two budgeting methods that you can use to pay off debt without paying interest charges or supplemental fees. The debt snowball method encourages you to celebrate small wins by asking you to pay off your littlest balances first. Meanwhile, the debt avalanche method helps you save on interest charges by having you pay off the highest-interest debt first.