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

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If getting out from under credit card debt feels impossible to you, you're not alone. The average credit card interest rate in the U.S. hovers between 17% and 18%, and many card issuers charge more. Here, we'll discuss when using a personal loan to pay off credit card debt makes sense, the pros and cons of using personal loans for debt consolidation, and alternatives to consider.

When should I use a loan to pay off credit card debt?

Use a personal loan to pay off credit cards when the loan interest rate is lower than your credit card interest rate.

Let's say you purchased a new roof for your home using a credit card. The credit card has an interest rate of 17%. With interest piling up, it feels like you'll never pay it off. Then, you find out you can get a personal loan with an interest rate of 7.99%. You decide to get a loan, use the money from the loan to pay off your credit card, and then pay back the loan. You'll pay less in interest this way.

That's debt consolidation. Debt consolidation means taking out a personal loan to pay off your other debt. Then, you pay back the loan (which usually has a lower interest rate than, say, credit cards).

Here's an illustration of how much time and money you could save by using a personal loan to consolidate your credit card debt. 

Debt Interest Rate Payment Time to Repay Total Interest
Credit Card $15,000 17% $450 46 months $5,444
Personal Loan $15,000 7.99% $470 36 months $1,919

If you consistently pay $450 toward the credit card debt, it will take 46 months to pay it off, and you'll spend $5,444 on interest.

If you could snag a lower-interest personal loan at 7.99%, the debt can be paid in 36 months, and you will pay a total of $1,919 in interest. That's a savings of 10 months and $3,525.

Is a personal loan really better than credit card debt?

Yes -- if a personal loan offers a lower interest rate and saves you money, it is better than credit card debt.

With most personal loans, the amount you pay each month stays the same. These are what's called "fixed installment" loans. While it may feel tough sometimes, making this fixed monthly payment gets your consolidation loan paid off at a steady clip.

With credit cards, the monthly payment can change. The "minimum due" on a credit card is usually a percentage of the balance. As interest accumulates, the balance changes, so the monthly payment changes as well.

Pro tip: Making fixed payments (like with a loan) reduces the time it takes to pay off debt -- and saves you money, too.

Pros and cons of loans

Before you decide to use a personal loan to get rid of your credit card balance, take a look at this rundown of pros and cons.

Pros:

  • Relatively easy to apply. If you're serious about taking out a personal loan for credit card consolidation, lenders make it easy to apply, often online.
  • The best loans for debt consolidation can simplify your life. If a bill sometimes slips through the cracks because you have trouble staying organized, a personal loan can simplify bill paying by giving you just one debt payment each month.
  • Saves you money when the interest rate is lower. If you shop around for personal loan lenders, you'll likely find one that offers a rate lower than that of your current debt. This way, you will save money over the life of the debt consolidation loan.
  • You know what you're getting into. There's nothing unpredictable about the best personal loans. The day you sign loan papers you know how much your payment will be, when it's due, and when it will be paid in full. 
  • Builds your credit score and expands your credit history. If you're just starting out (or rebuilding your credit), a personal loan is a steady way to establish a record of regular payments. 

Cons:

  • Does not address underlying problems. A personal loan may be a cure for your immediate problems via debt consolidation, but it won't cure your spending habits. If you got into credit card trouble due to bad habits, those need to be addressed -- whether you take out a debt consolidation loan or not.
  • Interest rate could be as high as (or higher than) your credit card rate. While you don't need excellent credit to benefit from a credit card consolidation loan, if you have poor credit, there is a chance you will not qualify for a rate lower than the rate paid on your credit cards.

Pro tip: If you struggle with overspending, a credit counselor can help. Talk with one before you decide to take out a loan, in case there are better options that can help you move toward financial freedom.

What are the alternatives to getting a loan for credit card debt?

If you shop around and find that using a personal loan to pay off credit card debt will not save you money, you need an alternative. Admittedly, none of these alternatives are easy -- but each is proven to work.

Work with your creditors

If you're looking at personal loans because you're having trouble making your regular credit card payments, call your creditors and let them know what's going on. Be honest about the issues, and ask them to work with you. They may lower your interest rate or forgive part of the debt.

It's important to note that if your creditor lowers your interest rate or settles the debt for less than owed, the agreement is reported to the credit bureaus and impacts your credit score. Debt settlement of any kind can remain on your credit record for seven years. Still, if you've been late on payments or are making partial payments, your credit score has already been negatively impacted. It's important to stop the bleeding and begin building stronger credit.

Pro tip: If your problem is not overspending, but poor credit, it is possible to get a personal loan with bad credit.

Tighten your budget

If credit card debt is causing you sleepless nights, and you think your budget may have some room for improvement, that's the first place to look. Any cuts you make (even small ones) can be diverted to your credit card debt, helping you get ahead of interest and pay it off faster. You don't necessarily have to cut anything out of your life entirely, but consider trimming your spending until your credit card debt is repaid. Here are some of the simplest ways to begin:

  • Put subscription services -- like premium television channels, pre-packaged recipe services, or even unnecessary deliveries for your pet -- on hold.
  • Limit impulse purchases at the grocery store.
  • Save money on utilities by turning off lights when you're not in the room, opening windows instead of turning on the AC, and doing laundry when water rates are lower.
  • Cook at home more and eat out less.
  • Spend time with friends at home instead of going out.
  • If you need new clothes, check out a consignment shop or thrift shop instead of a department store.
  • Sell things you don't need or use.

Take on a side hustle

If you're struggling with debt, you have undoubtedly already considered earning more money. Here, we'll cover a few ideas that won't eat up all your spare time, but will add extra cash to your monthly budget:

  • Sell things you enjoy making anyway. For example, if you are a woodworker who makes address signs or a knitter who creates adorable baby sweaters, sell them on sites like Etsy.
  • This isn't a side-hustle, but if you've been meaning to clean the basement, attic, or garage, sell anything of value that you don't use on a regular basis. You may be surprised by how much money you have lying around the house.
  • Offer a "homework hour" (even if it's just over Zoom). You know how tough it can be to get your own children to do their homework, so make it a community effort. For a fee, allow parents to drop their kids off at your home -- or log into a Zoom with you and some other neighborhood kids -- for one hour after school each day. Your role is to oversee their homework, answering questions as they arise.

Next steps: How to get a personal loan

If you decide a debt consolidation loan is your best path to becoming debt free, you can get started easily. Here's a quick rundown of the steps. For more info, check out our full guide on how to get a personal loan.

Order a free copy of your credit reports. One in five Americans finds at least one mistake. Even one can pull your credit score down, so carefully go over your three reports -- from Experian, TransUnion, and Equifax -- making sure the information is accurate. If you find a mistake, let the bureau in question know. They have 30-45 days to prove the information correct or remove it from your report. If it seems like a hassle, remember that the best loan interest rates and terms go to borrowers with the strongest credit.

Shop lenders. Everything, from minimum credit score for personal loans to interest rates and terms, varies by lender, so apply with several. The best personal loan lenders run a soft credit check to see what you qualify for (that doesn't impact your credit score). Once they've run a soft check, they tell you what your interest rate will be with them. It's only when you move ahead with a lender that there's a hard credit check. This check puts a small dent in your credit score, but it rebounds quickly with regular monthly payments.

Provide documentation. After a lender runs a hard credit check to verify all your information, there's usually a request for documentation. You may be asked for things like identification, pay stubs, or tax returns. The faster you provide the lender with these, the sooner you get your loan.

Sign loan documents and wait for funding. Personal loan lenders take anywhere from one business day to several weeks to deposit funds into your bank account, so be sure to ask about it as you shop lenders.

Pro tip: To save time, gather proof of identification, information about your employer, pay stubs, and last year's tax returns before applying for a loan.

Debt consolidation with a personal loan can be a faster, cheaper way to pay off your credit card balances. Before you take on a side hustle, cut expenses, or take out a personal loan for debt consolidation, think about what will work best for you. 

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