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by Christy Bieber | Updated July 21, 2021 - First published on Aug. 9, 2019
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Debt consolidation is a top reason for taking out personal loans -- but should you take out a new loan to repay your credit cards?
One of the top reasons people take out personal loans is to pay off existing debt. Here's why:
All of these are good reasons to get a personal loan for paying off credit card debt. But while getting a personal loan to repay your credit cards is a good idea in theory, that doesn’t mean it’s the right approach for everyone.
To decide if you should get a personal loan to pay off your credit card debt, you need to ask yourself the following questions:
Let’s take a closer look at each of these questions to help you decide if getting a personal loan to pay off a credit card is a good idea for you.
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Personal lenders typically check your credit score and want proof of income before they loan you money. Reputable lenders want to know you’re a low risk or they won’t take a chance on you.
Is your credit score low because you have a bunch of maxed out credit cards or late payments? You may be unable to get a personal loan to repay credit cards.
If you’re denied when you apply for a personal loan, you could try getting a cosigner -- but this puts the cosigner’s credit on the line. You could also work on paying down your credit cards until you improve your credit enough to qualify for a personal loan on your own.
While there are bad credit personal loans out there, many charge high interest and have other unfavorable terms. It's not worth taking one of these loans to consolidate debt.
The amount you can borrow varies from one personal lender to another. You usually can’t borrow less than $1,000 or more than $100,000. And just because a lender has a maximum loan amount of $100,000 doesn’t mean you’ll qualify for that much. Your income, existing debt, and credit determine how much you can borrow.
If you can only borrow $10,000 and owe $20,000 in credit card debt, it may still be worth taking out the personal loan. You'll still get to consolidate at least some of your credit card debt. Unfortunately, this may not save you as much money or make repayment as easy as consolidating all your credit card debt.
Personal loans generally have lower interest rates than credit cards. But this isn’t always the case.
If you have a credit card with a 0% promotional APR, you won’t find a personal loan with a lower rate. If you consolidated that card, you’d raise your interest rate and make payoff more expensive. In this case, you’d be better off waiting until your 0% rate is about to expire and then getting a personal loan to pay off the remaining balance.
Unfortunately, if you have bad credit you may not be able to qualify for a low-rate personal loan. Your only option may be a bad credit installment lender willing to loan you money at 35%. In that case, your interest rate would probably be higher than you’d pay on your cards. It would be a bad idea to take out this personal loan.
Factor in origination fees when determining if taking out the loan would save you money. If you have only a few months left to pay on your cards and would be hit with a high loan fee, stick to paying the cards.
Personal loans are designed to be paid off over a set time. Your monthly payment is based on the amount of time you have to pay off your loan.
In some cases, the monthly payment on your loan will be higher than the minimum payments on your card. This is a good thing. Your loan will be paid off much sooner than if you’d kept making minimum payments on your cards. And you’ll pay less interest over time. But it could also mean your loan isn’t affordable right now.
Find out the monthly payment of any personal loan you’re considering. Unless that payment fits within your budget, do NOT take the loan. Taking out a loan you can’t pay could ruin your credit, leave you on the hook for late fees, and lead to legal action against you.
Taking a personal loan to pay off your credit card debt can help you become debt-free faster if it reduces total debt repayment costs. But it’s not a magic fix for your finances. You must commit to spending within your means and not incur additional credit card debt.
If you take out a personal loan and free up credit on your cards but don't have your budget under control, you’ll max out those cards again. You could end up owing money on a personal loan and your credit cards.
Don't take out a personal loan until you’ve got a budget you can live on. Make sure you won't charge anything on your cards that you can’t pay off in full when your statement comes.
There’s no one right answer to the question of whether you should get a personal loan to pay off credit card debt. The answer depends on whether you can qualify for a personal loan, what your personal loan repayment terms would be, and whether you’re committed to becoming debt-free.
Unless you can save money and are confident you can pay off what you owe, you have some work to do first before getting a personal loan would make sense for you.
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent's top picks.
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