Here's What Happens When You Pay Off Your Credit Cards With a Loan
KEY POINTS
- After you consolidate credit card debt with a loan, you only need to make payments on the loan going forward.
- Your loan will have a consistent monthly payment amount, a fixed term length, and most likely, a lower interest rate.
- Be careful not to start carrying a balance on your credit cards again or you could end up in the same predicament.
If you've been struggling with credit card debt, you've probably wondered about the best way to pay it off. One of the most popular options is taking out a loan, and then using it to pay off your credit cards.
This method is called debt consolidation. It has a few key benefits, with the biggest being that loans generally have much lower interest rates than credit cards. Most consumers consolidate debt with personal loans, but you could also do it with other types of loans, such as a home equity loan.
Since debt consolidation isn't something most people do often, they're often unsure what to expect. Here's exactly what happens when you pay off your credit cards with a loan and how it could benefit you.
You only need to make payments on the loan going forward
Debt consolidation gets you down to one monthly payment. That's good from a convenience perspective, and it's especially helpful if making payments every month to multiple credit cards is hard to manage for you.
Once you've received your loan, you use those funds to pay the full balance on all your credit cards. As long as you're able to take out a large-enough loan, you can bring all your credit card balances down to $0. If you were paying off five credit cards, and you pay off all their balances with a loan, then you only need to make the loan payment going forward.
Note that it's still a good idea to check in on your credit card accounts at least once a month. Even after paying off the full balances, there may have been some pending charges that hadn't gone through yet and that you'll need to pay off. You should also review your credit card accounts regularly in case of fraudulent charges.
You have a fixed payment amount and term
One of the reasons debt consolidation loans work so well is that they provide a structured plan to pay off debt. Your loan will have the same payment amount due every month and a fixed term length, such as three or five years.
Credit cards are much more flexible than loans. Even though that has its benefits, it can also make paying off credit card debt harder, for a few reasons:
- You're only required to pay a small minimum amount per month, normally about 1% to 2% of the card's balance. If you make minimum payments, you won't make much progress on your debt.
- You can continue using your credit cards while in debt, charging up to the credit limit. Some people get stuck in neutral with their credit card debt because they keep spending money on their cards.
With a loan, you don't have either of these issues. The payment amount will be enough to have your loan paid off at the end of the term. You could also pay it off more quickly, as long as the loan doesn't have a prepayment penalty.
Your credit cards are paid off, but be careful not to end up in the same predicament
As explained above, paying off your credit cards with a loan will bring their balances down to $0. That's good news, as you won't be getting charged expensive credit card interest anymore. You'll only pay interest on the loan, which will most likely have a lower interest rate.
Don't start carrying balances on your credit cards again. Unfortunately, some people fall into the same habits as before. They see that their credit cards are paid off, and they decide they can afford to make some new purchases.
Remember that you haven't paid off your debt. You've only moved it from your credit cards to a loan. You still owe the same amount as before, and if you rack up debt on your credit cards again, you'll owe even more. Debt consolidation is a great opportunity to get control of your debt. Make the most of it by focusing on paying off your loan and not carrying credit card balances any more.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Related Articles
View All Articles