Should you use a personal loan to pay off credit card debt? Credit card debt can quickly get out of hand if you’re only paying the minimum amount each month. Interest rates on credit cards are typically very high, making it difficult to pay off the balance. One option to consider is using a personal loan to pay off your credit card debt. This may sound like a quick fix, but there are important factors to think about before making this decision.
In this blog, we’ll explain how personal loans work, how they can help pay off credit card debt, and the pros and cons of using this strategy.
Table of Contents
What Is a Personal Loan?
A personal loan is money you borrow from a bank, credit union, or online lender. You receive a lump sum of money and agree to pay it back over a fixed period, usually with a lower interest rate than credit cards. Personal loans are unsecured, meaning they don’t require any collateral, like a car or house, to back the loan.
Personal Loan Features:
| Feature | Description |
|---|---|
| Loan Amount | Typically ranges from $1,000 to $50,000 |
| Interest Rate | Lower than credit card rates (5%-36%) |
| Term | 1 to 7 years |
| Monthly Payment | Fixed for the life of the loan |
How It Works:
- Application: You apply with a lender.
- Approval: The lender checks your credit score and income.
- Receive Funds: You get the loan amount as a lump sum.
- Pay Off Debt: Use the loan to pay off credit card balances.
- Monthly Payments: Repay the loan in fixed payments.
How Can a Personal Loan Help with Credit Card Debt?
Credit card debt often comes with high interest rates, sometimes as high as 20-30%. If you’re only making minimum payments, it can take years to pay off your debt, and you’ll end up paying a lot in interest.
A personal loan can help by:
- Lowering Interest Rates: Personal loan interest rates are generally much lower than credit card rates.
- Fixed Monthly Payments: You will have predictable, fixed payments, which makes it easier to budget.
- Consolidation: If you have multiple credit cards with debt, you can use one loan to pay them all off at once.
By consolidating your debt into one loan, you simplify your finances and can often pay off your debt faster.
Example Comparison: Personal Loan vs. Credit Card Debt
| Debt Option | Interest Rate | Monthly Payment | Term | Total Interest Paid |
|---|---|---|---|---|
| Credit Card (20%) | 20% | $250 | 4 years | $2,060 |
| Personal Loan (8%) | 8% | $250 | 4 years | $720 |
In the table above, you can see that with a personal loan, you save a lot on interest. Over 4 years, you could pay less than half the interest you would on your credit card debt.
Pros and Cons of Using a Personal Loan to Pay Off Credit Card Debt
Pros
- Lower Interest Rates: As mentioned earlier, personal loans often have lower interest rates than credit cards, which means you save money in the long run.
- Fixed Payments: Unlike credit cards, personal loans have fixed monthly payments, making it easier to budget your expenses.
- Debt Consolidation: You can combine all your credit card balances into one loan, simplifying your financial life.
- Debt-Free Goal: Personal loans have a set repayment period, which means you know when your debt will be paid off.
Cons
- Temptation to Use Credit Cards Again: After paying off your cards, you might be tempted to start using them again, which can lead to more debt.
- Fees: Some personal loans come with origination fees, late fees, or prepayment penalties, which can add to the cost.
- Risk of Lower Credit Score: If you miss a payment on your personal loan, it could negatively impact your credit score.
- Not Always Cheaper: If you have a poor credit score, you may not get a lower interest rate on the loan, making it less beneficial.
Things to Consider Before Using a Personal Loan
1. Your Credit Score
Your credit score plays a big role in whether you get approved for a personal loan and what interest rate you’ll pay. If you have good credit, you’re more likely to qualify for a loan with a low-interest rate. If your credit isn’t great, the interest rate on a personal loan may not be much lower than your credit card rate.
2. Loan Fees
Many lenders charge an origination fee, which can be 1-6% of the loan amount. Be sure to calculate this fee to determine whether a personal loan is truly saving you money.
3. Monthly Budget
Consider whether you can afford the monthly payments on the personal loan. While the payments will be fixed, they may be higher than the minimum payments on your credit card. Make sure the loan payment fits within your budget.
4. Commitment to Paying Off Debt
Taking out a personal loan can help you pay off your debt, but you need to be committed to not racking up new debt on your credit cards. If you pay off your credit cards and start using them again, you could end up in even more debt.
FAQs: Personal Loan to Pay Off Credit Card
Q. Can a personal loan affect my credit score?
A. Yes, applying for a personal loan may lower your credit score temporarily due to the hard inquiry. However, if you make payments on time, it can improve your score over time.
Q. What is the typical interest rate for personal loans?
A. The interest rate on personal loans can range from 5% to 36%, depending on your credit score and financial history.
Q. Is it better to use a personal loan or balance transfer?
A. It depends. A balance transfer card often has a 0% introductory rate, but it might come with high fees. A personal loan offers fixed payments and may be better if you need more time to pay off the debt.
Conclusion on Personal Loan to Pay Off Credit Card
Using a personal loan to pay off credit card debt can be a smart move if you secure a loan with a lower interest rate and commit to paying it off without accruing more debt. It simplifies payments and can save you money on interest in the long run. However, it’s important to consider the fees, your credit score, and your ability to stick to a budget.
Disclaimer
The information provided in this article is for general informational purposes only and should not be considered as financial or legal advice. Please contact your financial institution or a legal advisor for advice specific to your situation.
About The Author
