When Should You Use a Personal Loan to Pay off Credit Card Debt?

When Should You Use a Personal Loan to Pay off Credit Card Debt?

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The factors that will determine which credit card debt consolidation option works best for you are your debt load, your credit score and history and your overall financial situation. In general, debt consolidation loans make the most sense for borrowers who can score a lower interest rate than what they’re currently paying or have more than $15,000 in debt to consolidate.

Personal Loan vs Credit Card

Credit cards are best used for short-term expenses that you can pay off within the month, as they tend to have high interest rates. On the other hand, personal loans are best suited for long-term expenses, including consolidating debt and making a big purchase, as rates tend to be lower and payments are spread out over time. Most people get lower rates on personal loans, especially those with excellent credit. However, many personal loan companies have rates as high as 36%.

Personal loans for debt help can come in handy if you have good credit but are having a hard time paying down your credit card debt. But taking out a personal loan only makes sense if you'll end up paying less interest than you currently pay on your credit cards. With credit cards, you don't have a set period for paying off your debt and can just make the minimum payments without penalty. Although, keep in mind that having a lot of outstanding debt can affect your credit score.

When Should You Use a Personal Loan for Credit Card Debt?

We recommend a loan to pay off credit cards if you can get a lower interest rate than you currently have or if you have more than $15,000 in credit card debt to consolidate. However, if you have an excellent credit score and less than $15,000 in credit card debt, you should consider a balance transfer credit card instead. Balance transfer credit cards typically have an introductory 0% APR period of anywhere from nine to 24 months, allowing you to pay down your debt without incurring interest for those months. Two downsides to balance transfer cards are the balance transfer fees, around 3% to 5% of the transaction, and lower credit limits, usually $15,000 or less.

When balance transfer cards don’t make sense, borrowers should check their rate on a personal loan to pay off credit card debt. If you can get an APR that is a few percentage points lower than what you’re currently paying, you can save hundreds or thousands of dollars over the long term. Most online personal loan companies will let you check your debt consolidation loan rate without affecting your credit score, so you should check at multiple places to see who can get you the best deal. Beware, though, as borrowers with poor credit may not get a better rate on a personal loan.

Besides getting a lower interest rate, one of the biggest advantages of getting a personal loan to pay off credit card debt is streamlining your payments. If you have accumulated debt across more than one credit card, a personal loan will consolidate these multiple monthly payments into a single payment. Another benefit is that this streamlined payment, combined with a lower interest rate, can help you pay off your credit card debt fast.

Consider Other Options

Personal loans aren’t the only or necessarily best way to consolidate credit card debt. Like we mentioned before, balance transfer credit cards can oftentimes make more sense than a personal loan. And for borrowers with poor personal credit, you may need to consider other alternatives, such as a secured personal loan or cosigned loan.

AlternativesBest for...Drawbacks
Balance transfer credit card
  • Borrowers with excellent credit
  • Borrowers with less than $15,000 in debt

  • Most cards have balance transfer fees of 3% to 5%
  • 0% APR period is temporary

Secured personal loan
  • Borrowers with poor or limited credit history

  • Can lose your collateral (i.e., car or house) if you cannot pay

Cosigned personal loan
  • Borrowers with poor or limited credit history
  • Lower interest rate if your cosigner has great credit

  • Risking your cosigner’s credit score if you cannot pay

Home equity loan or line of credit
  • Borrowers with equity in their home
  • Borrowers with poor or limited credit history
  • Lower interest rate

  • House can be foreclosed if you cannot pay
  • Can have high fees

Compare Lenders, Rates and Fees

If you’ve decided to take out a personal loan to pay off your credit card debt, make sure to shop around. Banks, credit unions and online lenders all make loans with competitive interest rates. We recommend borrowers consider getting a personal loan with the bank or credit union you already use as they might be willing to overlook some flaws in your application. Also, federal credit unions have rates capped at 18%, and many major banks have maximum rates between 18% and 25%. For comparison, many online lenders have rates as high as 36%.

Not only should you be looking for a lower interest rate, but you should think about the fees you may be charged for taking out a personal loan. Many personal loans will come with origination fees of 1% to 6% of the loan amount. This means that if you take out a $10,000 loan with a 5% origination fee, you will only receive $9,500 in your bank account. However, some lenders, like SoFi, LightStream and Discover, don’t charge any origination fees. Most lenders will charge late fee, non-sufficient funds or returned payments fees and check processing fees, but you won’t have to pay any of these fees if you pay on-time through direct debit.

Another factor to consider, especially for consolidating credit card debt, is whether the lender can pay your creditors directly or offers other perks that makes it easy to stay on track. Having your lender pay your creditors directly can remove any temptation to spend the personal loan on anything besides your debt. Some lenders, like Payoff, only make loans for debt consolidation purposes and provide a full suite of tools and support to help you stay on track with your debt. If you doubt your ability to stay fiscally responsible with your personal loan, these features can make a world of difference.

Madison is a former Research Analyst at ValuePenguin who focused on student loans and personal loans. She graduated from the University of Rochester with a B.A. in Financial Economics with a double minor in Business and Psychology.