The average American household carrying a credit card balance has over $5,500 in credit card debt in 2021. But how do you pay off credit card debt? One method to consider: taking out a personal loan.
By taking out a personal loan to pay off credit cards, you can use the funds from the loan to pay off your credit card debt. In turn, this will consolidate your multiple credit card payments into one monthly debt payment and potentially allow you to secure a lower interest rate. Still, there are pros and cons to consider if you’re thinking about getting a personal loan to pay off credit cards. Read on to learn more.
How Using a Personal Loan to Pay Off Credit Card Debt Works
Personal loans are a type of unsecured loan. There are a number of uses of personal loans, including paying off credit card debt. Loan amounts can vary by lender and will be paid to the borrower in one lump sum after the loan is approved. The borrower then pays back the loan — with interest — in monthly installments that are set by the loan terms.
Many unsecured personal loans come with a fixed interest rate that won’t fluctuate or change over the life of the loan, though there are different types of personal loans. An applicant’s interest rate is determined by a set of factors, including their financial history, credit score, income, and other debt, among other factors. Typically, the higher an applicant’s credit score, the better their interest rate will be, as the lender may view them as a less risky borrower. Lenders may offer individuals with low credit scores a higher interest rate, presuming they are more likely to default on their loans.
When using a personal loan to pay off credit card debt, the loan proceeds are used to pay off the cards’ outstanding balances, consolidating the debts into one loan. This is why it’s also sometimes referred to as a debt consolidation loan. Ideally, the new loan will have a much lower interest rate than the credit cards. By consolidating credit card debt into a personal loan, a borrower’s monthly payments can be more manageable and cost considerably less in interest.
Finally, using an unsecured personal loan to pay off credit cards also has the benefit of ending the cycle of credit card debt without resorting to a balance transfer card. Balance transfer credit cards offer an introductory rate that’s lower or sometimes even 0%. This might seem like an appealing offer. But if the balance isn’t paid off before the promotional offer is up, the cardholder could end up paying an even higher interest rate than they started with. Plus, balance transfer cards often charge a balance transfer fee, which could ultimately increase the total debt someone owes.
Understanding Credit Card Debt vs. Personal Loan Debt
At the end of the day, both credit card debt and personal loan debt are both simply money owed. However, personal loan debt is generally less costly than credit card debt. This is due to the interest rates typically charged by credit cards compared to those of personal loans.
The average credit card interest rate is nearly 17% APR. Meanwhile, the average personal loan rate is 9.41%, according to the Federal Reserve. Given this difference in average interest rates, it can cost you much more over time to carry credit card debt, which is why taking out a personal loan to pay off credit cards can be an option worth exploring.
Keep in mind, however, that the rate you pay on both credit cards and personal loans is dependent on your credit history and other financial factors.
Taking Out a Loan to Pay Off Credit Card Pros and Cons
While on the surface it may seem like taking out a personal loan to pay off credit card debt could be the best solution, there are some potential drawbacks to consider as well. Here’s a look at the pros and cons:
|Potential to secure a lower interest rate: Personal loans may charge a lower interest rate than high-interest credit cards. Consider the average interest rate for personal loans is under 10%, while credit cards charge an APR over 16% on average.||Lower rates aren’t guaranteed: If you have poor credit, you may not qualify for a personal loan with a lower rate than you’re already paying. In fact, it’s possible lenders would offer you a loan with a higher rate than what you’re paying now.|
|Streamlining payments: When you consolidate credit card debt under a personal loan, there is only one loan payment to keep track of each month, making it less likely a payment will be missed because a bill slips through the cracks.||Loan fees: Lenders may charge any number of fees, such as loan origination fees, when a person takes out a loan. Be mindful of the impact these fees can have. It’s possible they will be costly enough that it doesn’t make sense to take out a new loan.|
|Pay off debt sooner: A lower interest rate means there could be more money to direct to paying down existing debt, potentially allowing the debtor to get out from under it much sooner.||More debt: Taking out a personal loan to pay off existing debt is more likely to be successful when the borrower is careful not to run up a new balance on their credit cards. If they do, they’ll potentially be saddled with more debt than they had to begin with.|
|Credit score boost: It’s possible that taking out a personal loan could boost the borrower’s credit score by increasing their credit mix and lowering their credit utilization by helping them pay down debt.||Credit score dip: If closing the now-paid-off credit cards after taking out a personal loan is a temptation, perhaps reconsider doing so. Closing credit accounts that have been on a person’s credit report for some time could shorten their length of credit history and possibly negatively affect their credit score.|
How Frequently Can You Use Personal Loans to Pay Off Credit Card Debt?
Taking out a personal loan to pay off credit cards isn’t a habit you should get into. Ideally, it will serve as a one-time solution to dig you out of your credit card debt.
Applying for a personal loan will result in a hard inquiry, which temporarily lowers your credit score. If you apply for new loans too often, this could not only drag down your credit score but also raise a red flag for lenders.
Additionally, if you find yourself repeatedly reamassing credit card debt, this is a signal that it’s time to assess your financial habits and rein in your spending. Although a personal loan to pay off credit cards can certainly serve as a lifeline to get your financial life back in order, it’s not a habit to get into as it still involves taking out new debt.
So You’ve Decided to Apply for a Personal Loan to Pay Off a Credit Card. Now What?
The steps for paying off a credit card with an unsecured personal loan aren’t particularly complicated, but having a plan in place is important. Here’s what you can expect.
Getting the Whole Picture
It can be scary, but getting the hard numbers — how much debt is owed overall, how much is owed on each specific card, and what the respective interest rates are — can give you a sense of what personal loan amount might be helpful to pay off credit cards.
Choosing a Personal Loan to Pay off Credit Card Debt
These days, you can do most — or all — personal loan research online. A personal loan with an interest rate lower than the credit card’s current rate is an important thing to look for. Origination fees, which can add to a person’s overall debt and possibly throw off their payoff plan, is another thing to watch out for.
Paying Off the Debt
Once an applicant has chosen, applied for, and qualified for a personal loan, they’ll likely want to immediately take that money and pay off their credit card debt in full.
Be aware that the process of receiving a personal loan may differ. Some lenders will pay off the borrower’s credit card companies directly, while others will send the borrower a check that they’ll then have to deposit and use to pay off the credit cards themself.
Hiding Those Credit Cards
One potential risk of using a personal loan to pay off credit cards is that it can make it easier to accumulate more debt. The purpose of using a personal loan to pay off credit card debt is to keep from repeating the cycle.
Consider taking steps like hiding credit cards in a drawer and trying to use them as little as possible.
Paying Off Your Personal Loan
A benefit of using a personal loan for debt consolidation is that there is only one monthly payment to worry about instead of several. Not missing any of those loan payments is important — setting up a monthly reminder or alert can be helpful.
Budgeting Debt Payoff
Before embarking on paying off credit card debt, a good first step is making a budget, which can help a person better manage their spending. They might even find money in their budget to put toward that outstanding debt.
If a person has more than one type of debt — for instance, a mortgage, student loan, and maybe a car loan — they may want to think strategically about how to tackle them. Some finance gurus recommend taking on the debt with the highest interest rate first, a strategy known as the avalanche method. As those high-interest-rate debts are paid off, there is typically more money in the budget to pay down other debts.
Another approach, known as the snowball method, is to pay off the debts with the smallest balances first. This method offers a psychological boost through small wins early on, and over time can allow room in the budget to make larger payments on other outstanding debts.
Of course, for either of these strategies, keeping current on payments for all debts is essential.
Where Can You Get a Personal Loan to Pay off Credit Cards?
If you’ve decided to get a personal loan to pay off credit cards, you’ll next need to decide where you can get one. There are a few different options for personal loans: online lenders, credit unions, and banks.
There are a number of online lenders that offer personal loans. Many offer fast decisions on loans, and you can often get funding quickly as well.
While securing the lowest rates often necessitates a high credit score, there are online lenders that offer personal loans for those with lower credit scores. Rates can vary widely from lender to lender, so it’s important to shop around online lenders to find the most competitive offer available to you. Be aware that lenders also may charge origination fees.
Another option for getting a personal loan to pay off credit cards is through credit unions. You’ll need to be a member in order to get a loan from a credit union, which means meeting membership criteria. This could include working in a certain industry, living in a specific area, or having a family member who is already a member. Others may simply require a one-time donation to a particular organization.
Because credit unions are member-owned nonprofits, they tend to return their profits to members through lower rates and fees. Additionally, credit unions may be more likely to lend to those with less-than-stellar credit because of their community focus and potential consideration of additional aspects of your finances beyond just your credit score.
Especially if you already have an account at a bank that offers personal loans, this could be an option to explore. Banks may even offer discounts to those with existing accounts. However, you’ll generally need to have solid credit to get approved for a personal loan through a bank, and some may require you to be an existing customer.
You may be able to secure a larger loan through a bank than you would with other lenders.
Recommended: Credit Unions vs. Banks
Ready for a Personal Loan to Pay Off Credit Card Debt? Use SoFi Today!
SoFi personal loans have low interest rates and fixed monthly payments, which can be helpful when paying off high-interest debt. The online application is quick — find your rate in just one minute without any commitment to continue. If you’re approved, the funds are deposited directly into your account.
High-interest credit card debt can be a huge financial burden. If a person is only able to make minimum payments on their credit cards, their debt will continue to increase, and they’ll find themselves in a vicious debt cycle. Personal loans are one potential way to end that cycle, allowing you to pay off debt in one fell swoop and hopefully replace it with a single, more manageable loan.
Remember, however, personal loans aren’t for everyone. While they typically have lower interest rates than credit cards, they are still debt and should be considered carefully and used responsibly.
Can you use a personal loan to pay off credit cards?
Yes, it is possible to use a personal loan to pay off credit cards. After securing a personal loan, you will use the loan proceeds to pay off your existing credit card debt. Then, you will begin making payments to repay the personal loan.
How is your credit score impacted if you use a personal loan to pay off credit cards?
When you apply for a personal loan, the lender will conduct what’s known as a hard inquiry. This will temporarily lower your credit score. However, if you make on-time payments, and if taking out a personal loan improves your credit mix, your credit score can bounce back over time.
What options are available to pay off your credit card?
Taking out a personal loan to pay off credit cards is certainly an option, but it’s not your only choice. You can also pay off credit card debt with a balance transfer credit card, by exploring a debt payoff strategy like the snowball or avalanche methods, or by consulting a credit counselor or enrolling in a debt management plan.
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