Paying off a credit card with a personal loan can offer the advantage of potentially lower interest rates, saving money on interest charges over time. It also simplifies debt repayment by consolidating multiple credit card balances into a single monthly payment. However, the personal loan could come with origination fees or other charges that should be carefully considered.
When you have several high-interest credit cards, it’s easy to rack up more debt than you can manage. As your balance grows, you may find yourself worrying about your financial future. Fortunately, you have options. Learn more about using personal loans to pay off credit cards and get your finances back on track.
What Is a Personal Loan?
A personal loan is a type of installment loan. If you qualify, the lender gives you a lump sum of money, making it possible to pay off high-interest debt or cover some of your expenses. In return, you make monthly payments at a fixed interest rate.
The terms of a personal loan, including the interest rate and repayment schedule, vary based on your income and credit. Your credit also determines whether you qualify for a secured loan or an unsecured loan. The difference between the two is that a secured loan is backed by collateral, while an unsecured loan isn’t.
In banking terms, collateral is an asset used to secure a loan. If you don’t pay the loan as agreed, the bank is allowed to seize your collateral, sell it, and use the proceeds to cover your balance. With unsecured personal loans, there’s no need to put up any collateral.
Using Personal Loans to Pay Off Credit Cards
The process of getting a personal loan is fairly simple. You’ll need to provide the following information:
- Name
- Address
- Telephone number
- Social Security number
- Employer name
- Annual income
Once you complete an application, the lender reviews it to determine if you meet the minimum criteria for a loan. If you’re approved, you’ll receive a lump sum within a few days. Some lenders even offer same-day or next-day funding. If you want to pay off a credit card before your statement closing date, make sure you choose a lender with quick funding options.
Pros and Cons of Using a Personal Loan to Pay Off Your Credit Cards
Like any financial decision, using personal loans to pay off credit cards has several pros and cons.
Advantages
On the plus side, getting a personal loan allows you to pay off high-interest debt, which may prevent your balances from getting out of control. Personal loans typically have much lower rates than credit cards, giving you a little more breathing room.
For example, if you have a minimum monthly payment of $237 on a credit card with a balance of $7,599.14 and an APR of 19.99%, interest accounts for a significant portion of each payment. As a result, your payments don’t reduce the principal by much, allowing the balance to keep growing over time. If you paid the minimum every month, it would take more than 20 years to pay the full balance.
If you take out a personal loan at 9% interest, you can pay down your debt much faster, and you don’t even have to increase your minimum payment by all that much. For best results, apply for a personal loan when rates are as low as possible. The lower your rate, the less interest you have to pay every month.
Another benefit of using personal loans to pay off credit cards is that you don’t have to worry about making multiple payments every month. Once you pay your credit card balances, all you have to do is make your loan payment. If you don’t open any additional accounts, this makes it much easier to manage your finances.
Disadvantages
One disadvantage of this approach is that you need good credit to qualify for a personal loan with reasonable terms. It doesn’t help much to take out a personal loan at 18% when your credit card APR is at 19.99%.
Additionally, using personal loans to pay off credit cards is only helpful if you stop using your cards. If you keep making charges that you can’t pay in full, your credit card balance will continue to climb, and you’ll have to make minimum monthly payments on top of the payment for your personal loan.
Alternatives to Using Personal Loans to Pay Off Credit Cards
If getting a personal loan isn’t right for you, consider these alternatives.
Balance-Transfer Credit Cards
Many credit card companies offer balance transfers, which are transactions that allow you to move debt from one account to another. For example, if you have two high-interest credit cards, you can move the balance from each one to a card with a lower APR. The main benefit of doing a balance transfer is that your debt doesn’t accumulate as much interest.
Although balance transfers have some benefits, you need to time them correctly. It’s best to do this type of transfer when your credit card company is offering a 0% promotional period. Otherwise, you may not save enough money to justify the transfer fee.
Increased Income
Another option is to increase your income so you have more funds available to pay down high-interest balances. You can get a second job, sell unused items from your home or start a small business on the side. Once you have more income coming in, start paying more than the minimum due on each credit card to reduce your balances faster.
Should You Use a Personal Loan to Pay Off Your Credit Card?
Using a personal loan to pay off a credit card is only a good idea if taking out a loan helps you save a substantial amount of money. If the interest rate isn’t much lower, it’s not worth the effort to fill out an application and allow a lender to put a hard inquiry on your credit reports.
If you want to apply for a loan, it’s wise to check your credit reports beforehand. By law, you’re allowed to get a free copy of each credit report at least once per year. To keep a closer eye on your credit, take advantage of the free Credit Report Card offered by Credit.com. The report uses letter grades to make it easy to understand your current credit situation, and it updates every 14 days.
Source: credit.com