Should You Pay Off Credit Card Debt with a Personal Loan? What to Consider

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Updated on Thursday, December 17, 2020

Credit card debt can be an expensive burden on your finances. With high interest rates and indeterminate minimum payments, it can seem like you’re just throwing money at your credit cards every month without making a dent in your debt.

Make a plan to pay off your credit card balances in full with a credit card debt consolidation loan, which is a type of personal loan. Using a personal loan to pay off credit card debt helps you repay all your debts in one monthly payment on a set time frame, and it can save you money on interest over time.

Paying off credit card debt with a personal loan

Personal loans are lump-sum loans that are repaid in fixed monthly installments. They have a fixed APR, meaning your interest rate will stay the same throughout the life of the loan. Using a personal loan to pay off multiple credit cards can save you money on interest and get all your monthly payments in one place.

Consider the benefits and drawbacks of using a personal loan to pay off your credit cards:

You can consolidate payments

When you’re trying to keep track of too many cards, it’s easy to confuse payment deadlines or accidentally miss them altogether. Paying off multiple credit cards with a personal loan consolidates that debt into one monthly payment, meaning fewer bills to worry about.

You could lower your interest rate

You may be able to secure a lower APR on your personal loan than you were paying on your credit cards. Your interest rate is determined by factors including credit score, debt-to-income ratio, employment status and credit history.

Every lender has different borrowing criteria, but generally speaking, a high credit score and a low debt-to-income ratio will help you get a more competitive interest rate.

Your monthly payment could go down

If you’re able to secure a lower interest rate on your personal loan, it will likely reduce the amount on your monthly payments. This will allow you to enjoy a little extra room in your budget.

You can pay off debt faster

If you’re making the minimum payment on a substantial credit card balance, you could be stuck with the debt for decades. On the other hand, most debt consolidation loans have a term of 12 to 60 months. This can allow you to pay off the debt on a set timeline.

You might boost your credit score

If much of your credit portfolio is consumed by revolving accounts, diversifying the mix by taking on a personal loan can improve your credit score. Making monthly payments on a timely basis showcases your ability to manage debt responsibly. The increase will take time and won’t be monumental, but it’s a step in the right direction.

You might not qualify for a personal loan

Lenders don’t issue personal loans to just anyone. Since personal loans are unsecured, you’ll need a proven credit history to qualify. Lenders consider your credit score as well as your debt-to-income ratio, which is the amount of debt you have compared with your annual income.

You may not get a lower interest rate

Personal loan interest rates are largely based on your credit score. It’s possible your credit card interest rate will be lower than the rate you’re offered for a personal loan. In this case, it wouldn’t make sense to proceed with debt consolidation.

Your monthly payments may be higher

Credit cards offer more repayment flexibility than personal loans, since you’re able to make a minimum monthly payment. Personal loans are attached to a set repayment period — so although you may pay off your debt faster, the monthly payments may be higher.

If you don’t have a lot of extra room in your budget, this could be difficult to handle. The last thing you want is to default on the personal loan that was supposed to be getting you out of debt.

You may have to pay an origination fee

Some lenders charge an origination fee, which is tacked on to your personal loan. In most cases, the fee costs 1% to 8% of the total loan amount. Your origination fee is accounted for in your APR, so it’s a good way of measuring the total cost of the loan.

You may continue to rack up debt

Paying off your credit card balances with a personal loan frees up space to start racking up charges again. If you don’t completely trust yourself to cut ties with the plastic, it might not be wise to put the temptation out there. After all, debt consolidation is supposed to help improve your finances, not make them worse.

5 questions to ask before taking out a personal loan

In many cases, using a personal loan to pay off credit card balances is a wise move, but not always. Ask yourself these questions to make sure this is the right choice for your unique situation:

  1. Are you able to avoid racking up more debt?
  2. Should you keep paid-off credit card accounts open?
  3. Does the personal loan offer a more competitive interest rate?
  4. Will a personal loan ultimately cost you more money?
  5. Can your budget handle a consolidated monthly payment?

Paying off your credit card debt can seem daunting, but a personal loan gives you the power to repay this debt on a set timeline. Depending on your unique situation, a personal loan can save you money in the long run and regain control of your finances.

How to consolidate credit card debt with a personal loan

Using a personal loan to pay off credit card debt is simple, since personal loans are issued in a lump sum directly to your bank account. You can then use that money to pay off your credit card balances in full.

Finding a personal loan to meet your needs

Personal loans are offered by many online lenders, traditional banks and credit unions. To get the lowest possible APR on a personal loan for your financial situation, you should shop around and compare your options.

Many personal loan lenders let you prequalify, which estimates your APR with a soft credit inquiry. Prequalification will not affect your credit, so you can shop around for a personal loan without lowering your credit score.

When comparison shopping for a personal loan, take these factors into account:

  • APR: The APR you’re offered directly impacts your monthly payment and the overall interest you’ll pay on the loan. The lower your APR, the less the loan will cost over time.
  • Term length: Most personal loans come with a term length of 12 to 60 months, which is the amount of time you’ll have to pay the balance in full.
  • Fees: Some lenders tack on additional fees to personal loans, including origination fees and prepayment penalties. These can increase the total cost of the loan.
  • Loan amount: Personal loans are generally available in sums ranging from $1,000 to $50,000. However, not all lenders are able to approve the amount of money you might need.

3 alternatives to a personal loan

Taking out a personal loan may not be the best way to pay off credit card debt for your financial situation. If you don’t qualify for a personal loan or are unable to find one that meets your needs, here are a few other options to consider.

1. Balance transfer credit card

A balance transfer allows you to shift your debt from a high-interest credit card to one with a more competitive rate if you qualify. Many credit card companies even offer a 0% introductory APR, making it possible for you to pay less interest or none at all for a period of time, so you can pay your balance down faster.

MagnifyMoney’s balance transfer card marketplace lets you comparison shop to find the right credit card for your needs.

  • If you get a new card with an intro 0% APR and pay it off during the intro period, you can avoid paying interest on your debt.
  • Your new card might offer rewards, such as cash back or travel miles.
  • You could get a card with no balance transfer fees, making it possible to save even more money.
  • No prepayment penalty.
  • You’ll need good or excellent credit to qualify.
  • You can only consolidate credit card debt.
  • Cards often come with a transfer fee, which is typically 3%-5% of the transferred amount.
  • If you don’t pay the balance in full during the introductory period, you could face a higher APR than you were paying on your old  card.

2. Home equity loan or line of credit

Homeowners may be able to pay off credit card debt at a lower interest rate using a home equity loan or HELOC, which allows you to borrow against the equity in your home. Equity is the difference between what the home is worth and the outstanding debt on it.

For example, if your property is valued at $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity. Most lenders will allow you to borrow up to 85% of the current value of your home.

Tapping into home equity may allow you to pay off credit card debt at a lower interest rate, but since these loans are secured by your home, you risk losing the roof over your head if you default on the loan.

  • Interest rates are typically lower than credit cards and personal loans.
  • You can borrow large amounts of money based on your available home equity.
  • Repayment periods can be long, which can lower your monthly payment.
  • You need a good or excellent credit score to qualify.
  • If you fall behind on payments, you could lose your home.
  • You could be subject to fees and closing costs, and a long application process.
  • You need to have sufficient equity in your home.

3. Borrowing from a friend or family member

Getting a loan from a bank isn’t always the best way to repay existing debt. You may be able to pay off credit card debt at little or no interest by borrowing from a friend or family member.

More than half of Americans have either borrowed from or loaned money to a loved one within the past year, according to a November 2020 LendingTree survey. Unfortunately, more than a third experienced negative consequences from the transaction. If you take this route, set firm expectations upfront and openly discuss the loan amount and interest rate.

  • You won’t have to undergo a credit check.
  • If you have to pay interest, you’ll likely get a more competitive rate than what would be offered by a traditional lender.
  • You won’t have to spend time comparison shopping loans.
  • Missing payments could permanently damage your relationship with a loved one.
  • Owing a friend or family member money might change the dynamic of your relationship.
  • Tensions could arise if the person needs the money before the expected loan payoff date.