A personal loan may be helpful in paying off credit card debt, depending on the specific financial situation. If the credit card interest rate fees are extremely high, the borrower is unable to keep up with the annual fees or other charges, or if the minimum monthly payment due is unaffordable, that borrower may be able to get a better deal with personal installment loans. Keep in mind that factors like credit scores, other existing debts, and other aspects of the borrower’s financial history will play a part in determining if an installment loan will be helpful in paying off credit card debt.
Are you feeling like you’re drowning in credit card debt with no way out? According to CNBC, the average American has four credit cards!1 It’s no wonder so many Americans struggle with paying off credit card debt. Fortunately, there are solutions you can turn to. One of the most popular is using a personal loan to pay off credit card debt.
Here, you will learn all about credit cards, personal loans, and which option could help you the most on your journey toward becoming debt-free.
Credit Card vs. Personal Loan: What’s the Difference?
Credit Cards Defined
A credit card company issues revolving lines of credit to approved borrowers. With a revolving line of credit, consumers have access to a set credit limit each month. When a credit card holder has reached their credit limit but wants to make additional purchases, they may either pay off their balance or wait until the next billing cycle to access a renewed credit limit.
When it comes to interest rates on credit cards, borrowers are only charged interest against the money they spend. Furthermore, if the account holder pays off their balance before their billing cycle, they may be able to avoid interest charges altogether. But, if the account holder lets their balance accumulate from month to month while only making minimum payments, interest rates may cause that balance to actually grow with each billing cycle.
Personal Loans Defined
Personal loan lenders issue funding in one predetermined amount, which borrowers then pay back in installments of a fixed monthly payment. Rates for personal loans are typically a fixed interest rate. Since interest charges stay the same each month, you can easily anticipate what each of your monthly payments will be. This consistency makes personal loans a budget-friendly and manageable way for borrowers to go about consolidation and debt repayment.
Unlike credit cards, personal loans are not a revolving line of credit, which means borrowers will have to reapply every time they want additional funding.
Pros and Cons of Using Personal Loans Consolidate Credit Card Debt
If you’re thinking about paying off your credit card with a personal loan, consider the pros and cons.
Factors to Consider When Using Loans to Pay Off Credit Card Debt
|The duration over which the personal loan is to be repaid.
|Shorter terms mean higher monthly payments but less interest over time; longer terms mean the opposite.
|Interest Rate Type
|Whether the interest rate is fixed or variable.
|Fixed rates offer predictability over payments, while variable rates can fluctuate with the market.
|Upfront costs that some lenders charge to process a new loan.
|These fees can add to the cost of borrowing and should be factored into the total cost of the loan.
|Fees charged by some lenders if you pay off your loan early.
|Look for loans without prepayment penalties to avoid extra charges if you can pay off early.
|The total amount of money borrowed.
|Borrow only what is needed to pay off the credit card debt to avoid excess debt.
|The amount you will need to pay each month toward the loan.
|Ensure the monthly payment is manageable within your budget.
|Total Interest Paid
|The total amount of interest you will pay over the life of the loan.
|Compare against the total interest you would pay if you continued to pay credit card debt as is.
|How taking out a personal loan will affect your credit score.
|Initially may dip due to the hard inquiry but can improve over time with consistent on-time payments.
|The standing and customer satisfaction with the lender.
|Choose a reputable lender to avoid scams and ensure fair treatment.
|Your personal financial goals and how a personal loan fits into them.
|Consider how quickly you want to be debt-free and how the loan contributes to or detracts from this goal.
Pros of Paying off Credit Card Debt With a Personal Loan
Below are more details on the advantages you may enjoy when you get rid of your credit card debt with a personal loan.
Possibly Receive a Lower Interest Rate
Credit card interest rates can get relatively high. By consolidating your debt with a personal loan, you may have the opportunity to receive lower rates. With a lower interest rate, you could save money each month on your debt payment and end up saving hundreds or thousands of dollars over the life of your loan.
Consolidate and Streamline Multiple Payments
If you have multiple credit card payments, getting a personal loan to consolidate debt will allow you to knock all those payments down to just one. Dealing with just one debt payment a month can make staying on top of your financial responsibilities easy and manageable.
You can even sign up for autopay to take the stress out of remembering to make your payment completely!
Potentially Pay Off Debt Sooner
Paying off credit card balances can take months or even years, depending on your total balance and interest rates. But, when you consolidate your payments with a convenient personal loan, you may end up cutting down that time significantly.
Pro tip: to pay off your loan faster and save even more on interest rates, pay more than just your minimum payment due each month.
Potential for Credit Limit Increases
Credit card issuers often extend credit limit increases to responsible borrowers. By taking your balance and zeroing it out with a personal loan, your credit card issuer will see that you are taking the initiative and treating your credit debt seriously. Over time, there is a chance they will reward this behavior by increasing your credit limit, therefore making more money available to you on a regular basis.
Cons of Paying off Credit Card Debt With a Personal Loan
Make sure you fully understand the potential disadvantages of consolidating your credit card debt with a personal loan before you apply.
May End up With More Debt if You’re Financially Irresponsible
When you pay off your credit card with a personal loan, you aren’t eliminating debt; you are simply moving it around and making it more convenient to pay off. But, if you are not responsible with your spending habits and continue to use your credit card, you may find your personal loan debt coupled with your new accumulated credit card debt has left you in a worse financial position than where you started!
When you consolidate your credit card debt with a personal loan, do your best to stop spending on your credit card, so you don’t rack up another balance. Try to only make purchases using your credit during emergencies when there are no other options available. Even then, you should do everything you can to pay off the purchase immediately before it’s added to your balance.
How Do Debt Consolidation Personal Loans Work?
Check out the easy personal loan process below; you can get started any time you like!
Step One: Fill Out an Application for Personal Loan Funds
The first step is to fill out an application for your personal loan. Most lenders have either online or brick-and-mortar options available. Once you’ve completed the initial application, your lender should be able to give you a pre-approval status right away.
Step Two: Discuss Your Personal Loan Offers
Next, a loan agent will be in contact with you to discuss your personal loan offers. You can talk about monthly payments, repayment terms, as well as your loan amount.
Step Three: Send In Your Documents
Before you sign your contract, your lender will ask for a few pieces of documentation to confirm your information. The personal loan documentation lenders will ask for is:
- Government-issued photo ID
- Proof of residency
- Proof of income
- Bank account information
- Social Security Number or Individual Taxpayer Identification Number
Step Four: Sign Your Contract and Get Paid!
The last step is to sign your contract and receive your funding. Before you sign your loan agreement, read it over. Your contract will have all your loan details as well as information on any origination fees. Once you feel comfortable, sign your contract. From there, your lender can send your approved funds directly to your checking account!
How Will Paying off Credit Card Debt With a Personal Loan Affect My Credit Score?
Using a personal loan to pay off credit balances will almost certainly have an effect on your credit score. Unfortunately, if you are financially irresponsible with your debt consolidation loan, you may see your score drop. But, when you use your loan correctly, you may see that your credit score has gone up the next time you pull a credit report!
Improve Payment History
Since how on time you are with paying bills and expenses is the most significant factor that contributes to credit scores, you may see your score jump up quite a bit after you pay off your loan.
Lower Your Credit Utilization
By consolidating your credit card debt into a personal loan, you are essentially zeroing out your credit card balances. This fresh start on your credit utilization may cause your credit score to go up!
Increase Your Credit Mix
By adding a debt consolidation personal loan to your credit mix, you are showing lenders and credit bureaus that you are financially responsible and can handle taking care of your debts.
Other Ways To Pay off Credit Card Debt
According to USA Today, the average American has about $7,591 in credit card debt.2 Thankfully, there are more debt consolidation options than just personal loans. Check out a few alternatives for paying off credit balances.
Balance Transfer Credit Card
Instead of a personal loan, you may also consider using a balance transfer card to consolidate your credit balances. Using a transfer card may be a solid option for you if you are only looking to lower your interest rate. If not, you may find that balance transfer cards are more inconvenient. Before committing to a transfer card, make sure you can afford the balance transfer fee and that the transfer will actually help you save money in the long run.
Get a Part-time Job
Another great way to help you afford your credit card monthly payments is to get a part-time job. You can even find a remote, part-time job so you can earn money without ever having to leave your home!
Try a No-spend or Money Saving Challenge
You may also find that budgeting or trying a no-spend challenge will help you pay off your credit card debt. If you don’t already have an established budget, now is the time to set one up. Make a list of all your regular monthly expenses, then compare that total cost to how much money you make monthly. Try to designate any extra money left over for your credit card payment.
FAQ: Pay Off Credit Cards with Personal Loan
The time it takes to pay off credit cards with a personal loan varies based on the loan terms, including the interest rate and the monthly payment amount. Typically, personal loans have terms ranging from one to seven years.
The best interest rates for personal loans can vary widely depending on the lender, the borrower’s creditworthiness, and market conditions. It’s advisable to shop around and compare offers from multiple lenders, including banks, credit unions, and online lenders, to find the best rate.
Financial advisors, credit counselors, and debt consolidation experts can provide advice on using a personal installment loan to repay credit card debt. Non-profit credit counseling agencies can be particularly helpful in offering free or low-cost advice.
To apply for a personal installment loan, you should contact financial institutions such as banks, credit unions, or online lenders. It’s important to compare offers to ensure you get favorable terms that suit your financial situation.
Bank loan officers, financial advisors, or representatives from lending institutions can explain the process of using a personal loan to pay off credit card debt, including the application process, terms, and repayment plans.
Many individuals have successfully paid off their credit cards with a personal loan by consolidating their debt into a single loan with a lower interest rate, thereby simplifying their payments and potentially saving on interest.
Testimonials or reviews can often be found on personal finance forums, financial product review sites, social media groups, or the websites of lenders themselves.
You can get advice on negotiating with creditors from credit counselors, financial advisors, or debt settlement services. It’s important to seek advice from reputable sources, preferably non-profit credit counseling organizations.
A credit counseling agency can offer debt management plans, financial education, and personalized advice on debt consolidation strategies to help you manage your credit card balance and avoid late payment fees. They can also negotiate with creditors on your behalf to potentially lower interest rates and waive certain fees.
Having excellent credit typically provides you with more personal loan options at lower interest rates, making it easier to consolidate high credit balances. It also increases your chances of qualifying for unsecured personal loans, which tend to have more favorable terms and do not require collateral.
Whether a home equity loan or a secured loan is a better option than personal loans for consolidating debt depends on individual circumstances. Home equity loans can offer lower interest rates and larger amounts, but they put your home at risk if you default. Secured loans also require collateral. Personal loans tend to be unsecured and may be preferable for those who do not wish to risk assets or do not have excellent credit.
Reliable information on what a personal loan means, including the types and terms, can be found through financial education websites, personal finance blogs, and lender websites. For guidelines and assistance, you can contact your local consumer protection agency, which provides resources and information to help consumers understand loan agreements and protect their rights in financial matters.
CreditNinja’s Thoughts: Personal Loans and Credit Card Debt
Depending on your situation, using a personal loan to pay credit balances may be the perfect financial solution. As always, CreditNinja encourages you to do your research so you find the right lender and don’t end up with an inconvenient loan like payday loans, or end up using a tactic that can hurt your finances in the long run, like using another credit card to pay off your credit card debt. With the right loan, not only could you get a better deal on interest rates and loan terms, but you may also end up eradicating your debt sooner than you thought.
If you want to learn more about personal loans, check out the CreditNinja blog for free financial resources!