4 Reasons Using a Personal Loan to Pay Off Your Credit Card Is a Bad Idea

Should you trade one debt for another?

Personal loans are a way to borrow money that can be used for any purpose. That makes them different from a mortgage or an auto loan, which have to be used for the purchase of a home or a car, respectively. Getting a personal loan is fairly simple and involves choosing a lender based on available interest rates (your credit score impacts the rates you'll be offered, with the lowest interest rates going to borrowers with the highest credit scores), filling out an application, undergoing a credit check, getting approved, receiving your loan money, and paying back the loan over months or years, with interest.

The interest rates on personal loans can be lower than you'd get with a credit card, so if you're struggling with credit card debt, you may be wondering if you should take out a debt consolidation loan to get out from under it. Is this a good financial move to make? Here are a few reasons why you may want to think twice.

1. You may not get a lower interest rate

If you're struggling with bad credit on top of carrying card balances, you may not get a low interest rate. There are lenders that cater to those with less-than-stellar credit, but you will pay a higher interest rate than if you had good or excellent credit. Depending on the interest rate attached to the credit card or cards you're trying to pay off, you may not come out ahead with a personal loan. One way to ensure you're getting the best deal possible, even with a lower score, is to shop around with multiple personal loan lenders. Many offer loan pre-approval, so you can get an idea of what terms you'll qualify for before taking the plunge.

2. Personal loans may come with extra fees

Another problem you could face with using a personal loan to pay off credit card debt is extra fees. Some lenders may require you to pay an origination fee for the loan, often equal to 1% to 8% of the total amount you're borrowing. Other fees you could face may include a penalty for paying the loan off early, an application fee, and if you are late with a payment, you could also incur late fees.

3. Secured loans can be risky

If you cannot qualify for an unsecured personal loan, you may end up needing to take out a secured loan. These sometimes come with lower interest rates, but this is because you're risking collateral, like your house, car, or other valuables, which will be seized by the lender if you don't pay them back. This is a route you could take if you can't get a loan otherwise, but putting up collateral does add another layer of potential problems to using a loan to pay off credit cards.

4. It may not fix your spending problem

This final reason is a big one. If you can get approved for an unsecured personal loan at a reasonable interest rate, you will save money on your credit card debt payoff. But unless you are willing to really drill down and get at the root of your spending problem, it will not fix it. Let's say you get the loan, pay off the credit cards, and run into trouble again -- this time, with $0 starting balances on all those credit cards.

Eliminating the credit card temptation altogether might sound like the safest route, but closing your cards after they're paid off often isn't a great idea. Closing unused cards will negatively impact your credit score by lowering your total available credit limit and bringing down your average account age.

Ultimately, only you know yourself. If you pay off your cards with a loan, will you be able to avoid charging them back up again and ending up in an even deeper hole than before? If the answer is no, or you're unsure, then a personal loan to pay off your credit cards might not be the best solution for you.

Debt payoff alternatives

I got out of credit card debt myself this year, without using a personal loan. There are a few ways to approach debt payoff. I relied on the debt snowball method, in which you put more money into paying off your smallest balances first, then move on to the next balance. By the time you reach your largest balance, all the money you were putting into your other credit cards is going to that one final balance. Another debt payoff method with a similar concept is called the debt avalanche method, wherein you focus on paying off your highest-interest debt first. This way will save you dollars, but it may not be as psychologically satisfying as snowballing your debt. Watching your debts disappear through snowballing them can be very motivating.

A lot of well-meaning people will tell you that you can just budget your way out of money problems, but this assumes you're making enough money to begin with. Evaluate your spending versus your earnings to determine your own situation, but you'll likely find it will be more productive for your debt payoff if you can bring in extra money, perhaps through getting a side hustle or a higher-paying full-time job (or both).

Paying off debt is hard. It's difficult to be honest with yourself about your finances, but I can tell you, the rewards (both financial and emotional) are huge. Maybe getting a personal loan to help you out of credit card debt is a good solution for you, but be sure to consider all of the above angles before deciding for sure. Good luck -- I'm rooting for you.