Personal Loan to Pay Off Credit Card Debt

When is it right to get a personal loan to pay off credit card debt?

You should consider getting a personal loan to pay off credit card debt if:

• You have multiple credit cards with debt.
• You want to consolidate your debt payments into one.
• Your credit score, history, and other factors will ensure you get a lower interest rate on the personal loan, or you have collateral or a cosigner that will help you qualify.
• The new monthly loan payments fit into your budget and you’re able to make the payments on time each month.
• You create a plan to not use your credit cards or create new, financially savvy habits to ensure you don’t get into credit card debt again.

Using a personal loan to consolidate debt isn’t for everyone, and it doesn’t get you out of the cycle of debt unless you change your spending habits. It’s important to change the habits that got you into debt in the first place and start using credit cards more wisely.

Is taking a personal loan to pay off credit card debt a good idea?

Taking out a personal loan to pay off credit card debt can help you pay off your credit card debt in full. And, because personal loans typically have lower interest rates, you’ll be able to pay off your loan faster and save money. Plus, one monthly payment is much more manageable than multiple payments, so you’re less likely to miss a payment and owe late fees.

However, personal loans are a type of debt, so even though your credit cards are paid off, you’re not debt free and still must make your monthly personal loan payments on time. It’s also important to note that you’re not guaranteed a lower interest rate. Rates are dependent on factors like your credit score and history, income, and debt-to-income ratio. If you have a poor credit score, you may not get a lower interest rate.

Personal loans also come with fees, which you should keep in mind as you’re comparing lenders.

Pros & cons of paying credit card debt with a personal loan

What happens when you pay off a credit card is the complete end of that debt, which should always be your goal. Getting a loan to pay off credit card debt can be a great idea but isn’t right for everyone. Debt consolidation is a tricky process that can either save you money or cost you money, depending on your financial situation. Understanding the various pros and cons of taking a loan to pay off credit cards is an important step in the decision process.

Pros:

• All debt is consolidated into one loan at a single interest rate and a single monthly payment (assuming it is fixed)
• You can pay off credit card debt in full
• The potential to pay off debt sooner
• Assuming all payments are made on time and in full, you can see a boost in your credit score
• By consolidating debt, you streamline all potential credit payments into one

Cons:

• Taking out a personal loan could lead to more debt if monthly payments are missed
• A lower credit score may not allow for a favorable interest rate on the loan
• Potential fees, such as an origination fee, could make the personal loan not worth the cost

Learning how to choose the best personal loans to pay off credit card debt requires adequate research before applying. Avoid settling for the first lender you find online, as certain lenders who you may already have a history with (such as a bank) may offer a better interest rate due to that history.

What to consider while paying off debt with a personal loan?

When shopping for a personal loan, a few factors to consider include:

• Interest rates: Find a lender who offers the lowest interest rate for your credit score. The higher your score, the lower your rate and monthly payment will be, and the less interest you’ll owe over the life of the loan.
• Terms: The longer the term, the lower your monthly payment will be but the more you’ll owe in interest over the life of the loan. The shorter the term, the higher your payment but you’ll owe less in interest. Repayment terms vary depending on the lender, typically ranging from 12 to 84 months.
• Fees: Most lenders charge fees, whether they are origination fees, late fees, prepayment penalties, or others. Evaluate each lender’s fees and determine which you’re comfortable with in the event you have to pay them.
• Loan amount: Not all lenders have the same minimum and maximum amounts you can borrow, and what you need depends on how much credit card debt you have. Also keep in mind that your credit score and income can impact how much you can borrow. Make sure you qualify for the loan amount you need.
• Customer service ratings/reviews: It’s really important the lender offers great customer service in the event you have questions or problems repaying your loan.

Once you get the personal loan funds, using them to pay off the credit card debt immediately can help save you money and simplify your payments. Don’t use the funds for anything else or you may remain in credit card debt. Then, pay off your personal loan as quickly as possible to avoid accruing interest.

Finally, you’ll want to avoid using your credit card as you pay off the personal loan, and start using your cards only for purchases that you can afford. That way you can avoid going into credit card debt again in the future.

Alternatives to personal loans to pay off credit card debt

As mentioned, using a loan to pay off a credit card isn’t the right choice for everyone. Those with lower credit scores may be unable to secure a favorable interest rate that actually makes a personal loan on credit card debt worth it. Others may simply want to see another type of strategy for paying off credit card debt that doesn’t require taking on another loan. Regardless, here are alternatives to personal loans for paying off credit card debt:

1. Balance transfer credit card: This type of credit card allows a holder to transfer the debt from their various cards to a single card. Many balance transfer cards offer perks such as a 0% APR for the first year or so.

Learn more: Best Credit Cards for Balance Transfers

2. Debt settlement services: In some cases, a borrower can reach out to debt settlement services to get their debt forgiven. During this process, the borrower typically needs to pay a lump sum portion of the debt in return for having the remainder of the debt forgiven.

3. 401(k) loan: If you are willing to sacrifice some retirement savings in the short term, a 401(k) loan often comes with a lower interest rate. Just remember where the money you are borrowing from is being taken out of. Additionally, if you change jobs, you will need to repay the loan within 90 days.

Related: Should You Use Your 401(K) to Pay Off Credit Card Debt?

4. Debt snowball or avalanche: The debt snowball strategy is an effective strategy in which you pay off your smallest debt first and work your way up to the largest. By following this method, you roll the minimum payment you were making on that debt into the next-smallest debt payment.

Related: Debt Snowball vs Avalanche – Which is Right for You?

5. Home equity loan or home equity line of credit: A home equity loan occurs when a lender agrees to lend you the requested funds, but the collateral on those funds is the equity in your home.

Related: Home Equity Loans vs. Home Equity Lines of Credit

6. Talk to your credit issuer: In some cases, your credit issuer may be open to building a custom repayment plan that suits your finances more. Reach out to your credit issuer and see if they have any resources that may help in your repayment plan.

7. Debt management plans: Above all, one of the best alternatives to taking on a personal loan is to build a debt management plan. List out all your sources of debt and the repayments required in order to evaluate which sources of debt you should emphasize repaying first. This can also help you identify a better strategy, such as debt consolidation, that could help reduce your debt.

There are a few different ways to deal with credit card debt and find relief. Research the best option for your unique financial situation to ensure you are receiving the best help available.

Credit card debt vs. personal loan debt

All forms of debt are similar in principle, with credit card debt and personal loan debt not being an exception. For these types of debt, the biggest similarity is that a minimum payment is typically required each term for your account to not be considered in default. Assuming this minimum payment is met, but the full amount is not paid off, the remaining amount will begin accruing interest.

This is the primary difference between credit card debt and personal loan debt. The interest rate offered on personal loans is usually lower than that offered for credit cards. Additionally, personal loans have a predefined repayment period which provides a known end date, unlike a credit card to which you may be paying off debt forever.

How to consolidate credit card debt without hurting your credit?

Regardless of the debt consolidation strategy you use to help pay off credit card debt, the best way to avoid hurting your credit is to make on-time payments. Create a repayment plan and stick to it relentlessly until your debt is paid off. The point of debt consolidation is to bring all your debt payments to one place so that you don’t forget about making a payment.

This strategy is only effective if you make your payment completely and on time. If you do this, your credit score will likely begin to improve over time.

How do I qualify for a personal loan to pay off debt?

A few common requirements lenders will evaluate when determining whether to approve your loan application include:

• Credit score and history: While having a higher score will be beneficial and make it easier to get a low interest rate and better term, most lenders require you to have a minimum credit score of 670 or above for the best options. However, some lenders will accept scores of 600 or above, or even as low as 580. If you have a poor credit score, make sure to do your research to find a lender who will work with you.
• Income: Lenders also have income requirements to ensure the borrower is able to repay the loan. These minimums can vary by lender, from as low as $20,000 to $50,000 or more depending on your desired loan amount. You’ll be asked to show proof of income when you apply.
• Debt-to-income ratio (DTI): Your DTI is the portion of your gross monthly income that goes toward your monthly debt expenses, expressed as a percentage. Again, these requirements vary by lender, but typically you want a DTI of less than 36%.
• Collateral or cosigner: If you are applying for a secured loan, you must have an asset you can use as collateral (like a car, house, savings or investment account) or a cosigner to help you qualify.

How to choose and compare personal loan lenders?

As alluded to above, there are several factors that can impact the benefit you may receive from getting a loan to pay off credit cards. Your credit score, financial history, personal information, salary, and more can all play a role in the overall cost and benefit. There are a few steps you can follow when getting a loan to pay off credit card debt:

1. Determine the exact loan amount you need: There is no reason to add more debt when consolidating your existing credit card debt. Figure out the amount of money you need to pay your debt in full and apply for that specific amount.
2. Research different lenders: For those who have higher credit scores, banks will typically (not always) offer favorable interest rates on personal loans. Those who have substandard credit scores are more likely to receive a loan from a third-party lender, but this will have a higher interest rate. Regardless, consider various lenders and try to find an option with the lowest interest rate and few, if any, fees.
3. Review terms of the loan offers: When comparing loans, there are a few main factors to consider: principal of the loan, tenor of the loan, monthly payments, interest rate, and any fees. Try to determine if you can easily make the monthly payments requested, and use a personal loan calculator to see what you are actually paying over the life of the loan.
4. Accept the loan: Only after considering all the factors, deliberating between your offers, and viewing what your total repayment will be should you accept a loan offer.

How do I apply for a personal loan to pay off credit card debt?

Many personal loan applications can be completed online in just a few minutes, and you may get approved immediately or within the same business day. Before you fill out the application there are a few things you should prepare, and then once you begin the process there are additional steps to take:

1. Check your credit score and take steps to improve it if necessary. Check your credit report for any errors and pay down as much debt as you can while also ensuring to make debt payments on time each month.
2. Determine your loan amount. You must know how much you want to borrow before applying.
3. Get prequalified. When comparing lenders, get prequalified online. This doesn’t affect your credit score but can give you a more accurate estimate of your interest rate, monthly payment, and other loan details to help you compare.
4. Apply. Once you’ve chosen the right lender, fill out an application. You’ll be asked to submit personal information like your contact information, date of birth, Social Security number, and others. You’ll also be asked to submit proof of things like address, income, employment, and others. Having this information prepared ahead of time can make the application process smoother.
5. Accept the loan. Once approved, you’ll be sent the loan agreement to review, accept and sign.
6. Get the funds. The funds will be deposited in a lump sum into your bank account. You can then use these funds to pay off your credit card debt.

General advice for paying down debt

In general, the best way to get large amounts of debt off your plate is to combine as much as possible under one interest rate and payment per month. By doing this, you can reduce the risk of forgetting a payment, and only having a single interest rate will save you money. Use strategies that target smaller debt amounts first, that then roll up into the larger debt amounts you owe. This way, slowly over time, you will begin to reduce the amount of debt you have and more of your budget can go towards the larger principal payments you owe on a monthly basis.