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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Getting out of credit card debt can be a slow and frustrating process, especially if your card has a high interest rate. Depending on how high your balance is, if you only make the minimum monthly payment, it could take you several years to repay the debt.

One method of paying this type of debt off quicker involves taking out a personal loan to refinance the debt. Using a personal loan to pay off credit card debt may be a good decision if you can secure a lower interest rate and avoid racking up new charges.

When should you use a personal loan for credit card debt?

Personal loans can be a great way to pay off credit card debt as they have fixed interest rates and fixed repayment terms, typically between 12 to 60 months.

The process for refinancing or consolidating credit card debt is simple, too: You’ll shop for and apply for a personal loan that has more favorable terms than you’re currently paying on your credit cards. The amount you apply for should equal your outstanding debt. If approved for the loan, you’ll use the funds from the personal loan to pay off your credit card balances, and then make payments as usual on your personal loan.

Whether using a personal loan to pay off debt is right for you depends on several factors, including the amount of credit card debt you have, your credit score and the loan’s affordability.

You have a large amount of credit card debt

Personal loans have minimum borrowing limits, typically from $1,000 to $5,000. If you don’t have a lot of credit card debt, taking out a loan may not be worthwhile, as you’d be paying interest on money you don’t need.

That said, you don’t need to pay off just credit card debt when you get a loan. For example, if you have a high-interest auto loan in addition to credit card debt, you could take out a personal loan that allows you to pay them both off via debt consolidation.

You have good or better credit

Your credit score is a key factor in the loan application process. Personal loan lenders typically give borrowers with higher credit scores lower interest rates. If you have good to excellent credit — a score of at least 670 — you have a better chance of nabbing a personal loan with a lower interest rate than what you’re paying on your credit card debt.

Conversely, borrowers who have lower credit scores risk getting a higher rate than their current card. Because personal loans can reach high double-digit rates (and even triple-digit rates), it’s important to apply for and compare loan offers. Most lenders will allow you to see the rates you could qualify for via a soft credit check, which won’t affect your credit.

You can afford the new loan

Whether the personal loan is affordable is something else to consider. If the fixed monthly payments fit your budget, using a loan for credit card debt may be a good idea. However, before you take out a loan, explore all of your borrowing options. For example, borrowers with good to excellent credit scores may qualify for a balance transfer credit card with a 0% introductory rate, which usually lasts up to 18 months.

If you qualify for that option and can afford to repay the loan before the introductory period expires, it could be less expensive. However, the downside is that banks typically cap the transfer amount at $15,000. A personal loan may be a better option if you owe more than that amount.

The loan would improve your financial situation

When you refinance or consolidate debt, your primary goal is to make repayment more affordable — and that doesn’t just mean getting a lower APR to repay your debt.

For example, you could choose a short repayment term of 12 months in order to fast track debt repayment. During this period, you’d minimize interest charges but have a higher monthly payment. On the flipside, you might choose a longer repayment period in order to reduce your monthly payments. This would cost you more in interest over time, but could also free up cash you could use for other financial priorities.

As you consider this debt relief option, make sure you understand your needs and wants to ensure debt refinancing or consolidation is right for you, and that it’d make life easier.

How to consolidate credit card debt with a personal loan?

  1. Check in on your credit. You can see your credit score via free services, such as through your credit card company. AnnualCreditReport.com also lets you review your credit report from the three major credit bureaus for free. Dispute any errors you find, as that could boost your credit score.
  2. Find out how much you need to borrow. Add up your outstanding credit card balances, whether you’re just refinancing one card or consolidating multiple balances with a personal loan.
  3. Research lenders and apply for prequalification. Shop lenders by reviewing terms they offer and fees they charge. Most lenders allow you to see rates without affecting your credit (more on comparing lenders below).
  4. Choose a lender and gather documentation. After choosing a lender you like, collect supporting documentation for your application, such as a government-issued I.D. and pay stubs or tax returns. Lenders will want to see this information to verify your identity and income, for example.
  5. Formally apply. Submitting a formal application will require a hard credit check, which will result in a small, temporary ding on your credit. You’ll provide requested documents during this step.
  6. If approved, review the loan agreement. If the terms are agreeable to you, you’ll sign the loan agreement. Expect funds to arrive within a few business days, depending on the lender.
  7. Pay off your existing debt. Once funds are disbursed to you, you’ll use them to pay off your existing credit card debt. Some personal loan lenders can pay off your credit card debt for you, though this is less common.
  8. Start making payments. You’ll repay your new personal loan in fixed monthly installments based on the terms you agreed to.

How to compare personal loan lenders

If you decide to use a personal loan to pay off credit card debt, it’s best to shop around so that you get a good deal. To do so without harming your credit, prequalify with multiple lenders. When you do this, the lenders will perform a soft credit check — this has no impact on your credit score, but can reveal to the lender how strong of a candidate you may be.

When you prequalify for a loan, a lender will show you an estimated APR and repayment terms, which you can use to compare with other offers. Here’s a list of factors to consider as you compare lenders:

  • APR: The loan’s APR gives you a clearer picture of how much it costs to take out the loan, since it accounts for other borrowing fees in addition to the interest rate.
  • Origination fees: Some lenders charge a fee for underwriting and processing your loan, and these fees can reduce the loan amount. For example, let’s say you take out a $10,000 loan with a 3% origination fee — if the origination fee isn’t included in the total loan amount, you’d receive $9,700.
  • Term length: If you get a longer term length, your monthly payments may be more affordable. However, you’ll end up paying more interest over the life of the loan.
  • Monthly payment: Based on your loan’s terms, the lender will give you a repayment schedule. Make sure you can afford the fixed monthly payments before agreeing to the loan.
  • Prepayment penalty: To recoup the interest charges lost from you paying off the loan early, some lenders charge a prepayment penalty. If you want to repay your loan as soon as possible, you may want to avoid more finance charges.
  • Late fee: If you miss personal loan payments, some lenders will charge you a late fee. However, to avoid this charge, you can enroll in automatic payments.
  • Direct payment to creditors: Some lenders can pay your creditors directly, which can streamline the process of refinancing or consolidating your credit card debt.

Other ways to consolidate credit card debt

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.

Alternatives
Best 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