Should you take out a personal loan to pay off your credit card debt? Taking out a personal loan to pay credit card bills might be an excellent answer to several problems.
You already know how difficult it is to make numerous monthly payments on your credit card if you have outstanding debt.
A personal loan may help you pay off your credit card debt in full and save money on interest over time since personal loans generally have lower interest rates than credit cards.
However, there are several advantages and disadvantages to paying off credit card debt with a personal loan.
Let’s see what you have to choose from, how it works, the advantages and disadvantages, and how to use it to pay off your credit card debt.
- Why you should use a personal loan to pay off credit card debt? For 3 reasons
- 4 Pros of using a personal loan to pay off credit card debt
- Get The Loan Comparison Calculator
- 3 Cons of using a personal loan to pay off credit card debt
- How to pay credit card debt using a personal loan (Step-by-step)
- Frequently Asked Questions
Why you should use a personal loan to pay off credit card debt? For 3 reasons
1. You might be able to pay off your credit card debt in full
If you have a large number of high-interest credit card debts, a personal loan may help you pay off your credit card debt in full.
This is especially true if you have never been in credit card debt before. Being free from credit card debt will not only provide you with peace of mind, but it may also help your credit score.
However, paying off your high credit card debts and ditching the high-interest charges that come with them can be a significant financial burden, which is why personal loans are one of the most advantageous methods to pay down debt.
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2. You’ll probably be able to obtain a lower interest rate
The average credit card interest rate is approximately 16%, but personal loan rates are frequently about 6%.
Even if your real interest rate is determined by your credit score, the amount of money you want to borrow, and the terms of your loan, a personal loan’s APR will almost certainly be lower than that of your credit cards.
If you use your personal loan to pay off your credit card debt and borrow money at a rate that is lower than the interest rates on your credit cards, you may save a significant amount of money in interest charges.
3. You’ll receive one monthly payment.
It may be challenging to make all of your credit card payments on a monthly basis. You can combine all of your debts into a single monthly payment with personal loans.
It’s also wise to compare your options and pick the one that works best for you. This can make budgeting easier, which might help you pay off your personal debt faster.
Keep in mind: The greater your monthly payments, the more money you put toward loan repayments over time, resulting in bigger interest savings.
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4 Pros of using a personal loan to pay off credit card debt
Personal loans might be useful if your goal is to get out of debt faster than you would if you just made the monthly minimum credit card payments.
But a personal loan comes with a number of advantages:
1. Simplifying Payments with Consolidation
If you make monthly credit card payments, keeping track of all due dates and required minimum payments might be difficult.
If you miss a payment or do not pay at least the outstanding balance, your credit score may drop and you may be charged late payment costs.
Taking out a personal loan to consolidate your credit card payments will allow you to make one monthly payment rather than many.
Reducing the number of payments can save you time and space, allowing you to accomplish other tasks.
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2. You may be able to obtain a lower interest rate
If you have credit card debt, you may be charged 20% APR or more (which is awful).
According to Credit Karma, borrowers with excellent credit pay 12% to 17% interest on a cash advance.
Furthermore, personal loans have an average interest rate of less than 10%, which is far lower than that of business loans.
If you have a good credit score, you may acquire even cheaper personal loans than these.
By refinancing your loan to a lower rate and term, you may save money on interest. You’ll also be able to pay off your debt sooner because you will be paying less in interest.
3. You May Pay Off Debt Sooner
If you make modest credit card payments every month, it might take years or even decades to pay off your balances, depending on how much you owe.
You may pay off your credit card debt in one fell swoop and establish a payment plan for one personal loan at a time if you take out a personal loan.
The amount you borrow and your lender will determine the loan’s terms.
If you were on track to pay off your credit cards in less than 5 years, you may well be able to do so in under five.
Take out a personal loan and pay it back as soon as possible (just don’t fall into the trap of borrowing again on credit cards).
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4. You Could Improve Your Credit Score
Taking out a personal loan has the potential to positively influence your credit score in a variety of ways, even if it entails a hard credit check and temporarily lowering your credit score.
Taking out a personal loan affects your credit score by adding to your credit mix, which accounts for 10% of your rating.
Having several sorts of credit and debt on your report shows that you are a responsible consumer since it indicates that you have a diverse range of credit and debt.
You can also improve your credit utilization by paying down your debts. Your credit utilization is the amount of debt you have compared to how much credit is available to you.
When you’ve paid off all of your credit card debt, you’ll have zero dollars outstanding in interest.
It’s considered excellent credit usage if you utilize less than 30% and ideally less than 10%.
3 Cons of using a personal loan to pay off credit card debt
Taking out a personal loan to resolve credit card debt has several potential disadvantages.
Consider these factors before taking action:
1. Personal loans may result in extra obligations if taken out
Taking out a personal loan to pay off your credit cards and then accumulating debt on them is like adding more money owing.
A personal loan for credit card consolidation should be used only after other attempts, such as raising monthly credit card payments or taking out a balance transfer credit card, have failed.
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2. You’re Not Sure If You’ll Receive a Lower Interest Rate
Personal loans generally have lower interest rates than credit cards, but this may not be the case for everyone.
If you have bad credit, you may not be eligible for a personal loan.
Personal loans with bad credit are not always less expensive—and quite frequently more costly—than the rate you’re paying right now.
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3. The fees associated with personal loans
Lenders may charge a variety of fees, such as a late payment fee, an origin fee, and a lack-of-funds penalty.
Keep this in mind as you shop for personal loan lenders.
How to pay credit card debt using a personal loan (Step-by-step)
If you’d like to borrow money and pay off your credit card debt on your own, follow these steps:
1. Fill out the application for a personal loan
Look at all of your options before making a selection.
Examine different loan alternatives to see whether you qualify for one that appears to be the ideal option for someone with your credit and debt profile.
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2. Take advantage of the loan to pay off your credit card debt
In many situations, you may expect to have money from a personal loan deposited straight into your checking account.
Make sure your personal loan payment is set to auto-pay, and that there’s money in the account.
If you spend that money on anything other than credit card debt repayment, you’ll be in debt and owe money on your personal loan.
3. Pay off any personal loan debts quickly as feasible
Focus on paying off your personal loan as quickly as feasible after you’ve paid off your credit card debt in full.
Check to see whether your loan penalizes you for early repayment and if so, find out how much more money you’ll need to put toward it each month.
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4. Avoid paying off your personal loan with your credit cards
Don’t fall into credit card debt as you pay off your personal loan.
Use your credit cards as little as possible, and only make purchases you’re certain you can pay off in full every month.
Frequently Asked Questions
In many circumstances, you’ll be able to get a personal loan with a lower interest rate than what your credit cards are charging you for your obligations.
Furthermore, if you make your personal loan payments on time, there is no negative impact on your credit score as long as you pay off the entire amount in full before the due date.
A variable-rate personal Loan or credit card allows you to make larger repayments when you choose.
You may pay more than the required payment each time, which saves money on interest.
If the bulk of your credit is revolving credit, such as credit cards, a personal loan may assist diversify your credit profile.
Helping you create a payment history, Making your personal loan payments on time will help you establish a good payment history, which can boost your credit score.
Abdulrahman is the founder of Financeive and a financial advisor with +3 experience writing about loans and debts. He took the Nanodegree from Udacity with a degree in Business Administration and had previously finished his bachelor’s degree in Accounting as well.
He is an expert on Personal Finance who knows how to make sure that your finances will not hold anyone back anymore – even if they are struggling with paying off previous debts or just starting their life financially alone as a young adult without much income yet but lots of potential opportunities ahead.
He used to help Individuals and Small Businesses to get loans with low interest and has figured out ways to help most of them to get out of loans Debt.