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Can you pay a loan with credit card

can you pay off a loan with a credit card

Whether you can use a credit card to pay off a loan depends on your lender and the type of personal loan you have. It is expected that most payments on a loan be made with cash, whether that be a bank transfer or debit card, or check, but there are financial institutions that do accept payments on personal loans via credit card.

That being said, just because you can, does not necessarily mean that you should. If you ask any personal finance expert, they probably would not recommend it except for particular circumstances. 

Are Credit Cards Accepted in Personal Loan Payments?

A majority of personal loan providers may not outright accept credit card payments. The typical methods for making monthly payments on your balance are: 

  • ACH transfers directly from your bank account 
  • a written check 

However, if you are looking into making your monthly installments in another way, some workarounds exist that may allow you to utilize a credit card account. Although, we need to note that this can come with extra fees. 

Paying down a personal loan with a credit card can also put you in a dangerous position of overreliance on your credit cards, leading to unmanageable debt and considerable interest charges. 

Using a Third-Party Payment Service

One way in which you can work around a loan provider that doesn’t take credit card payments directly is to use a third-party payment service. Servicers like Plastiq make your loan payment for you and allow you to pay them by credit card. You can use this kind of third-party payment service on any sort of loan: personal loan, auto loan, and even your mortgage

The drawback with using this method is the transaction fees they charge for every payment you make. Plastiq has a service charge of nearly 3%, which can add up if done repeatedly. 

Is Credit Card Debt or Loan Debt Better?

Credit card debt and loan debt are essentially the same in that they are both outstanding balances that need to be repaid. Even though one is a line of credit rather than a fixed loan, one of the only differences that can help you determine one as worse or better than the other is the interest rate. 

Credit cards and loans don’t have a standard interest rate across the board making one consistently more affordable than the other. Interest rates on credit cards vary widely depending on the credit card issuer, card type, and the credit scores of the account owners. 

There are many different types of loans that have incredibly different interest rates. A car loan for a borrower with excellent credit could have a lower interest rate, while online payday loans, sometimes referred to as single payment credit, and other loans for bad credit may have very high-interest rates. 

If you have a personal loan with a fixed interest rate, this kind of debt will likely cost you less in the long run, as most credit card debt has a variable APR that can go up in time. So even if your current interest rate on your credit card balance is less than your personal loan’s APR, that could not always be the case if your loan is fixed. 

Unless you have relatively high-interest charges on your balance or an increasing variable APR, it’s usually not advisable for you to use a credit card to pay off a personal loan except as a last resort. This is especially true if your credit report is not in the best shape, as a change in your credit score could cause variable interest rates to skyrocket.

Potential Consequences of Using Credit Cards to Repay Personal Loans

AspectPotential ConsequencesAlternative  
Interest AccumulationUsing a credit card might lead to higher interest accumulation if not paid off quickly. Consider a balance transfer card with a 0% introductory rate or a lower interest personal loan for consolidation. 
Credit Utilization RatioUsing a large portion of your credit card limit can negatively impact your credit score. Aim to use less than 30% of your credit limit or increase your credit limit if possible. 
Multiple DebtsPaying a loan with a credit card can lead to juggling multiple debts, complicating financial management. Consider debt consolidation loans that combine multiple debts into one with a fixed interest rate. 
FeesSome third-party services charge fees for facilitating credit card payments towards loans. Direct bank transfers or setting up auto-debit can avoid these fees. 
Long-term Financial HealthContinual reliance on credit cards without a repayment strategy can lead to long-term financial strain. Create a budget, set aside an emergency fund, and consider financial counseling.
Missed Payments Missing credit card payments can lead to late fees and increased interest rates. Set up payment reminders or autopay to ensure timely payments. 
Cash Flow Management Relying on credit cards can disrupt regular cash flow management. Regularly review financial statements and prioritize essential expenses. 

When Is It Smart To Pay a Loan Using Credit?

The question comes down to, in what circumstances does it make sense to pay down a personal loan with a credit card? Generally, the answer to this is it makes sense to pay your loan with a credit card when it would mean you’d be saving money by paying less interest overall.

Transfer Loan to a Balance Transfer Credit Card

An instance in which it may be wise to pay off a personal loan with a credit card is in the case of moving your debt to a balance transfer card. By doing this, you could take advantage of a 0% APR introductory period reducing the amount of money you need to pay in interest. Did you know that approximately 61% of young adults from the Gen Z generation and 50% of millennials with credit card debt may be unfamiliar with balance transfer credit cards?1

Not every balance transfer credit card allows you to transfer a personal loan, but many credit card issuers do. Qualifying balance transfers of personal loan debt onto a credit card account with a low introductory period interest rate could allow you to save money and pay off your loan early. 

Many of these credit cards have a balance transferring fee, but the additional fees could be well worth it with the interest savings if you can be sure of the credit card balance before the promotional period rates end. 

Things to Keep In Mind When Considering a Balance Transfer

  • Some balance transferring cards only allow you to transfer credit card debt, so you will want to be sure that you find a credit card issuer that provides loan balance transfers on at least one of their credit products. 
  • The rate of interest could increase rapidly once the promotional period ends on a balance transfer credit card, so it is crucial that you pay down the balance of your loan amount before the APR rises.
  • The amount that you owe on your personal loan and any balance transferring fee required cannot exceed the credit limit on the credit card you plan to transfer the balance to. 

Before applying, you want to be sure that you can qualify for a credit card limit high enough to fit the balance transfer of the loan amount so that you don’t waste an unnecessary hard inquiry on your credit report. 

  • The credit card company will usually charge a balance transfer fee between 3% and 5%. You will want to be sure that this transfer fee is offset by the money you will be saving using the balance transferring card so you don’t cost yourself even more. 

You Can’t Make the Payment

Another circumstance in which it might make sense for you to make a loan payment with your available credit is when you can’t afford to make your monthly payment on time. If your current financial situation is particularly difficult and it’s not possible to make your loan payment when it’s due, you might want to cover it with your credit card to avoid any late fees. 

Deciding to do this is not a long-lasting solution, as you are simply putting off the monthly payment until your next credit card bill is due. While it might be necessary to cover one monthly payment on your loan with your credit card, you will want to do everything in your power to ensure you have enough cash to cover your next credit card payment before you get hit with a late fee which you were trying to avoid in the first place. 

If there is another option to make sure you meet your minimum payments despite financial difficulties, attempt that option first, especially if your credit card has higher interest rates than your loan. 

Cash Advance

If you can’t make your loan payment, you might be tempted to take out cash advance loans from your credit card issuer. Borrowing money through your credit line in this way could help you skip the step of third-party payment services and help you pay bills when you are desperate. But cash advances shouldn’t be relied upon except as a last resort as they are an extremely high-interest debt that has no grace period.

How About Using a Personal Loan To Pay off Credit Card Debt?

Conversely, what about using a loan to pay off credit card debt? According to DC News Now, the average credit card balance per cardholder as of the beginning of 2023 was $5,733.2 Debt consolidation loans are usually far more common than a credit card balance transfer for a loan because of the high-interest rates on credit card balances. 

If you have a significant amount of credit card debt or too many monthly installments to keep track of, you have several options to consolidate credit card debt. You can do a balance transfer of multiple cards onto one to minimize the amount of credit card payments you have every month. Or you could obtain a loan to pay off all your credit cards in full so as to consolidate debt into one place.

The benefits of consolidating credit card debt with a personal loan rather than a balance transfer card exceed simply minimizing your monthly payments. You could save a significant amount of money on the high-interest charges on each credit card payment. 

Additionally, personal loans for debt consolidation could diversify your credit mix and reduce your credit utilization ratio, which could lead to a noticeable improvement in your credit score. 

If the interest charges on your credit cards are costly enough, you could be making a minimal impact on reducing your debt with monthly payments. Taking years or even decades to pay down your balances could make it exceedingly difficult to attain any kind of financial freedom in your life. Consolidating your credit debt with a loan could cut down the time it takes you to pay off what you owe. 

Tips for Minimizing Your Overall Debt

If you are struggling to make your debt payments, whether they be on your credit cards or personal loans, it could be a sign that your debt is beginning to spiral out of control. It might be time to actively reduce your debt to live more freely. 

Here are some ways in which you can start paying off your debt to attain the financial freedom you deserve: 

Stop Taking on New Debt

The best first step in paying off your debt is to stop taking on new debt completely. That means no further loans and no new credit cards. Nothing new other than what is completely necessary. 

This also means putting a complete halt to all purchases on the lines of credit that you already have open and relying solely on the cash you have in your bank account. 

This might be incredibly difficult, especially if you are used to heavily relying on credit cards, but there is no way you can make a meaningful dent in your debt if you are constantly adding more to it. 

Create a Budget to Track Your Spending

Cutting down on your spending can seem daunting, but it becomes more doable when you get organized. Creating a budget to track your expenses could make it easier to reallocate money going towards unnecessary spending for paying down your debt. 

We suggest using a budgeting app to encourage you to use it more often than you would an inconvenient excel spreadsheet. Many apps out there will divide your expenses into clear categories with a simple press of a button and access to your checking account statements. 

From there, you can identify which expenses you can cut down on to increase the amount you put towards your debt payments.

Proven Debt Repayment Methods

For a more disciplined approach, use one of the debt repayment methods that have been proven successful time and again. Two of the most common methods are the debt snowball method and the debt avalanche method. 

The debt snowball method uses the psychological tool of motivation by having you tackle low-balance debt first. The debt avalanche method saves you money on interest by having you pay off high-interest debt first. Both have helped many people reduce or eliminate their debt. 

Increase Your Financial Literacy

The best way to ensure that you are continuously improving your financial situation rather than making it worse is to work on your financial literacy. Once you know what to avoid and why you need to prevent it, you will be more vigilant in your finances. This is why financial education is so crucial to managing your money. 

It is a good idea to always think twice and read up before making any big decisions when it comes to your finances, especially debt. 

FAQ: Paying a Personal Loan With a Credit Card

What is the difference between loans and credit cards?

Loans: A loan is a lump sum of money that you borrow from a financial institution with the agreement to pay it back in fixed monthly installments over a specified period. Loans typically have fixed or variable interest rates and may be secured (requiring collateral) or unsecured.
Credit Cards: Credit cards provide a revolving line of credit, allowing you to borrow up to a certain limit, repay it, and borrow again. You’re required to make a minimum payment each month, but you can choose to pay more. Interest is charged on any balance not paid in full by the due date.

Where can I get a loan vs. credit card? 

Loans: Banks, credit unions, online lenders, and peer-to-peer lending platforms.
Credit Cards: Banks, credit unions, and credit card companies. Some financial institutions offer personal loans that can be loaded onto a credit card for convenience.
There are also certain types of lenders that offer both personal loan and credit card options.

How do I determine the interest, monthly payment due, and repayment term of a loan?

The interest rate, monthly payment, and repayment term are typically outlined in the loan agreement. You can also use online loan calculators to estimate monthly installments based on the loan amount, interest rate, and term.

What is the minimum payment on a loan?

For most loans, the minimum payment is the fixed monthly installment agreed upon when taking out the loan. It covers both the principal and interest.

Who can and can’t pay a loan with a credit card?

Whether you can pay a loan with a credit card depends on the lender’s policies. Some lenders may accept credit card payments, while others may not. It’s essential to check with the specific lender.

How do I find out my loan balance vs. credit card balance?

Loan Balance: Contact your lender or check your most recent loan statement.
Credit Card Balance: Log into your online credit card account, check your latest statement, or contact your credit card company.

What is a grace period?

A grace period is the time between the end of a billing cycle and the due date for that billing cycle’s payment. During this time, no interest is charged on new purchases if the previous balance was paid in full.

What is a prepayment penalty?

A prepayment penalty is a fee charged by some lenders if you pay off your loan before the end of its term. It’s a way for lenders to recoup some of the interest they would have earned if the loan had been paid over the full term.

What is an origination fee?

An origination fee is a one-time charge by lenders for processing a new loan. It’s typically a percentage of the loan amount.

What is a cosigner release fee?

A cosigner release fee is not common, but in cases where it exists, it’s a fee charged to remove a cosigner from a loan, freeing them from any liability for the loan.

Can I use a cash advance from my credit card to make student loan payments?

While it’s technically possible to use a cash advance to pay student loans, it’s generally not recommended. Cash advances often come with high interest rates and fees. It’s better to explore other options, such as balance transfers to a zero-interest credit card, which might offer promotional rates for a set period.

Is it advisable to use balance transfers to a zero-interest credit card for paying student loans?

Transferring a balance from student loans to a zero-interest credit card can be tempting due to the promotional interest rate. However, once the promotional period ends, the interest rate on the credit card can skyrocket. It’s essential to ensure you can pay off the balance before the promotional period ends. Additionally, not all credit card companies allow balance transfers for student loan payments.

What are the pros and cons of using cash advances and balance transfers to pay loans, especially student loans?

Pros: Immediate access to funds (cash advances) and potential short-term interest savings (balance transfers to zero-interest credit cards).
Cons: High fees and interest rates for cash advances, potential balance transfer fees, and the risk of higher interest rates after the promotional period for balance transfers. Using these methods to pay student loans can also extend the debt and potentially cost more in the long run.

CreditNinja’s Thoughts on Paying Loans with Credit Cards 

While using credit cards to quickly repay a loan’s balance may seem like a quick and easy solution, it may not be what’s best for you in the long run. While there are always CreditNInja personal loans to help you get out of a tricky financial emergency, CreditNinja suggests you try the following options before applying for a loan: 

  • Use funds from a savings account 
  • Get a temporary part-time job to earn some extra income
  •  Ask a friend or close relative for a small loan 
  • Reorganize your budget to free up more income to use for loan balance or credit card debt 

References:

  1. This credit card debt payoff strategy could save you thousands | CNBC
  2. Data: Credit card debt soars amid inflation | DC News Now
  3. Should you use a credit card to pay off a loan? | Chase
  4. Can You Pay Off a Loan With a Transfer Credit Card? | Experian
  5. Can You Pay Off a Loan With a Credit Card? | Fool.com
  6. Using A Personal Loan To Pay Off Credit Card Debt | Forbes Advisor 

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