Should I Use a Personal Loan to Pay Off Credit Card Debt?

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Personal loans are a great way to pay down credit card debt, but they may not be the best method for everyone. Image source: Getty Images.

How you use a personal loan is limited only by your imagination, but one of the smartest ways to use them is to pay off credit card debt for good. Rolling your credit card debt into a low-interest personal loan can reduce your monthly payments, help you pay off your debt faster, and save you hundreds or thousands of dollars in interest along the way.

Here's the case for personal loans, and an often-overlooked solution that may be better for borrowers with good or excellent credit scores.

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Why you should use a personal loan to pay off credit card debt

A personal loan is practically designed as a debt-busting tool. Widely available to people who have high incomes or low incomes, good credit scores or bad credit scores, they're a go-to way to cut down on credit card debt for all the following reasons:

  • You can lower interest rates -- The key advantage of a personal loan is that they are typically less expensive than carrying a balance on a credit card. Whereas a credit card will usually have an annual percentage rate (APR) of 18%, low-interest personal loans can start as low as 5% for borrowers with good to excellent credit.
  • You don't need collateral -- A personal loan is backed by your ability to pay, nothing more, which means you won't have to turn over your car title or pawn off your valuables to borrow money.
  • You make progress with every payment -- A personal loan is an amortizing loan, which means that every payment you make goes toward principal and interest. If you get a 36-month personal loan, your balance will fall to zero upon making the last payment. This can be beneficial for people who feel that they are on a treadmill with credit card debt and making no progress toward paying it off.
  • You get more time -- Personal loans generally have repayment terms ranging from two to five years, though three years seems to be the "sweet spot" for most lenders. This gives you the ability to lock in a low interest rate and pay off a balance with equal monthly payments that fit your specific budget needs.
  • You don't need perfect credit -- Personal loans have lower credit score requirements than balance transfer credit cards, which make them the best choice if you have some past late payments or limited credit history.

How much you can save by paying off a credit card with a personal loan

How much you can save by using a personal loan to pay off credit card debt largely comes down to a few variables: How much debt you have to pay off, the APR you pay on the loan and credit card, and how long you need to pay down the balance.

That said, we can use an example to illustrate the potential savings. Let's assume you have $5,000 of credit card debt at the "standard" APR of 18%. You can continue to make payments on the card and slowly pay down your balances. Alternatively, you can borrow $5,000 with a three-year personal loan at a "standard" APR of 9%.

Slashing your rate in half can save you a lot of money, as the table below shows.

Terms/debt type Credit card Personal loan
Balance $5,000 $5,000
APR 18% 9%
Monthly payment $180.76 $159.00
Interest paid $1,507.43 $723.95

Data source: Author estimates and calculations.

Using a personal loan to pay off credit card debt makes a big difference. In this example, you would reduce your monthly payments by about $22 per month, and save $783.48 in interest over the life of the balance.

Of course, how much you save depends entirely on the difference in APRs, balances, and loan duration.

I created the table below to show you how much you would save by refinancing $5,000 of debt at an 18% APR with a personal loan that carries a lower APR.

Personal loan APR/Loan term 24-month 36-month 48-month 60-month
7% $618.18 $949.55 $1,302.90 $1,677.67
8% $563.62 $866.89 $1,190.90 $1,535.11
9% $508.72 $783.48 $1,077.59 $1,390.52
10% $453.50 $699.34 $962.98 $1,243.91
11% $397.95 $614.46 $847.07 $1,095.30
12% $342.08 $528.86 $729.88 $944.69
13% $285.87 $442.52 $611.40 $792.11

Data source: Author calculations.

The table may be slightly overwhelming, so I'll give you a guide. The way to read this table is that if you move a $5,000 balance at an 18% APR to a 24-month personal loan at a 7% APR, you would save $618.18 in interest by paying the balance off in 24 equal monthly installments. If you had $10,000 of credit card debt, you'd save twice as much, or $1,236.36, over the repayment term.

Importantly, even a relatively small decrease in the APR results in big savings. Reducing the APR on a $5,000 balance from 18% to 13% can save you $611.40 on a 48-month loan, and $792.11 on a 60-month loan.

How to get a good deal on a personal loan

Banks may highlight all kinds of features and other perks with their twist on a personal loan, but what really matters, more than anything, is how much you can borrow and the price (APR) you'll pay to do it. Here's a short list of the best practices that can help you get a lower rate on a personal loan:

  • Get multiple quotes -- Personal loan companies know that the rate you get matters, so they expect you to shop around for a good deal. Most will allow you to get a quote on a loan without a hard pull on your credit score, so you don't have to worry about affecting your credit score as you look for a good deal.
  • Compare lenders on APR -- A loan's "annual percentage rate," or APR, measures the true cost of a loan including any interest and other fees like origination fees. Comparing lenders on APR is the only way to do an apples-to-apples comparison of personal loans.
  • Shop in your credit band -- Some lenders specialize in loans to prime borrowers, others specialize in loans to people who have credit problems. If you have bad credit, you'll only waste your time applying for a loan from companies that only offer loans to prime borrowers. If you have good credit, you'll probably get a higher than anticipated APR if you apply for a loan from a company that specializes in people who have bad credit. (See our page on the best personal loans to see the credit score requirements for different lenders.)

If you have good or excellent credit, a balance transfer may be a better option

Personal loans are a good way to pay off credit card debt, but they aren't the only way. As strange as it may sound, one of the best ways to pay off credit card debt is by opening another credit card account. Many card issuers have promotional balance transfer credit cards which reward new cardholders with a 0% intro APR for transferring a balance from an existing credit card to a new credit card.

Let's say you have $5,000 of credit card debt at an 18% APR that you want to eliminate in the next 15 months. You can continue paying on your existing credit card balance or transfer the balance to a new card that offers 0% interest for 15 months, with no balance transfer fee.

The table below summarizes these two options, detailing how much you'd have to pay each month, and how much you would pay in interest if you paid off your balance in 15 months.

Terms Current credit card Balance transfer card
Balance $5,000 $5,000
APR 18% 0% for 15 months, 18% thereafter
Monthly payment to pay off in 15 months $374.72 $333.33
Total interest paid $620.83 $0.00

Data source: Author example and calculations.

It's plainly obvious that paying off a $5,000 balance at a 0% intro APR is better than paying off the same balance at an 18% APR. By moving your balance and paying it off during the introductory period, you'd save nearly $621 in interest charges and reduce your monthly payment by nearly $41 per month.

Balance transfers can also be better than personal loans, even if you don't pay off the balance in full during the 0% intro APR period.

For example, let's say you have $5,000 of credit card debt at an 18% APR, and you can afford to make $200 payments each month to pay it down. You can either move the balance to a card that offers 0% intro APR for 15 months (18% thereafter) or take out a personal loan at a fixed interest rate of 9%.

Which solution is better? I ran the numbers and put them in the table below.

Terms Balance transfer card Personal loan
Balance $5,000 $5,000
APR 0% for 15 months, 18% thereafter 9%
Monthly payment $200 $200
Months to pay off debt 26 months 29 months
Total interest paid $183.24 $557.91

Data source: Author example and calculations.

The difference here is substantial. The balance transfer card is paid off three months faster than the personal loan, saving you $374.67 in interest compared to a personal loan that carries a 9% APR.

The reason the balance transfer card is a better deal is because of how much progress you make during the 0% intro APR period. By the time the 0% intro APR expires and your APR jumps to 18%, your balance has already been slashed from $5,000 to $2,000 because no interest was charged over the intro period. In contrast, after 15 months of payments on the personal loan, the balance stands at $2,430 because a portion of each payment went toward interest, slowing your progress toward paying down your debt.

The head start you get from having a 15-month period of 0% intro APR puts the math in the balance transfer's favor. In fact, in this scenario, the balance transfer card beats any personal loan with an APR of 3.25% or higher, which is to say it beats any personal loan that a non-billionaire could qualify for.

The best way to pay off credit card debt

Mathematically, a personal loan is usually better than a balance transfer when you need four years or more to pay down debt. For shorter periods of time, a 15-month 0% balance transfer card will typically save you more in interest. Of course, that's what the math says.

Some people like that personal loans offer a clean break from credit card debt compared to balance transfers. If you use a personal loan to pay off credit card debt, and swear off credit cards forever, you'll be free from debt the second you make your last payment on your personal loan.

There's no fudging with a personal loan. You know exactly what the monthly payment is, when your debt will be paid off, and you can't add to your balance as easily as you can with a credit card. You get a personal loan, you make the same payment for a certain payment of time, and then it's all over. Boom! You're debt free.

In contrast, a balance transfer card requires more discipline. The minimum payments are usually a very small percentage of your balance, thus requiring you to make the decision to pay more than the minimum to make real progress toward paying down your debt. Too many people transfer balances to 0% intro APR cards then only pay the minimum payment, ultimately ending up exactly where they started.

If you have the discipline to use a balance transfer card to its fullest, it's usually a better way to pay off credit card debt. If you don't think you do, use a personal loan. No matter which you use, it's better to act sooner rather than later, as with each passing day, more interest is getting added to your balances.

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