Should You Use A Personal Loan To Pay Off Your Credit Card?
9-Minute ReadJuly 25, 2022
Keeping up with your credit card payments is important, but when you’re juggling multiple cards and balances at once, repaying your debt can become a struggle. In order to ease your mind, and maybe save yourself from high interest charges, you could consider taking out a personal loan to simplify and consolidate your debt.
This article will take you through the process of paying off your credit card debt using a personal loan, and go over the benefits and drawbacks of this repayment strategy.
Personal Loan Vs. Credit Card
A personal loan is a large sum of cash that a borrower can use for just about anything within reason. A credit card can function similarly, but instead of a lump sum, it’s a line of credit that you can borrow from over and over up to a certain limit, or balance. You can repay both on a monthly basis, although a personal loan payment will be a fixed amount, whereas your credit card bill will depend on how much you spent that period.
When compared to personal loans, credit cards can typically have higher interest rates – some with a 20% APR. You could get a lower interest rate on a personal loan by having good or excellent credit, and that fixed rate will stay the same throughout the life of the loan.
How To Use A Personal Loan To Pay Off Credit Card Debt
Using a personal loan to pay off credit card debt is part of a process called debt consolidation, wherein a borrower essentially replaces their various debts with a single loan, which they then repay in monthly payments.
The process for consolidating your debt this way is as follows:
1. Apply For A Personal Loan
When you’re considering applying for a personal loan, you should first shop around for different lenders and get prequalified to see what rates and terms you may qualify for based on your credit report. Some lenders may offer you better interest rates than others, and you’ll want to make sure you pick the one with the best deal. Once you’ve decided, you can go ahead and submit a full application.
Approval and delivery of your personal loan can take 1 – 7 business days, so you can expect to receive your money quicker than most other loans. Some lenders even offer same-day financing, meaning you could see your money the same day you’re approved for the loan. Rocket LoansSM offers this service.*
2. Pay Off Your Credit Cards
You can apply for a loan of up to $45,000 – sometimes higher under special circumstances – and once the money arrives in your account, it’s yours to spend. Divide the funds across all of your credit card balances until they’re at zero. Once that’s done, take a moment to enjoy being free of credit card debt.
3. Repay The Personal Loan
We say to enjoy the moment because now comes the part where you repay the loan that got you out of credit card debt. Don’t be afraid, though. You’ve chosen the lender offering the repayment plan that best suits your financial situation, and you just have the one monthly payment to keep up with. Again, that’s only one debt repayment you have to worry about now, with a fixed monthly amount and interest rate.
If you’re financially able to, you could even try and pay off your personal loan early and be done with it.
4. Be More Careful Using Credit Cards
You should avoid using your credit card as much as possible while repaying your personal loan. That doesn’t mean you have to give your card up entirely, though. Credit cards can be a great way to build credit, if used responsibly. Once your loan is fully repaid, start using your card again for purchases you know you can afford. You want to be careful not to fall back into the debt you just got out of.
Pros And Cons Of Using A Personal Loan For Credit Card Debt
As you can see, there are a lot of benefits to paying off your credit card with a personal loan. Of course, there can be some drawbacks as well. Let’s review the pros and discuss the cons below.
- You could get a lower interest rate with a personal loan.
- You can have only one monthly payment to worry about.
- You can pay off some or all of your credit card debt.
- You could end up boosting your credit score.
When Should You Take Out A Personal Loan To Pay Off Your Credit Cards?
You shouldn’t commit to a new loan blindly. Consider your financial situation first by asking yourself the following questions:
- Do you have good or excellent credit?
- Is your debt-to-income ratio (DTI) fairly low?
- Have you been comfortably able to afford your monthly payments?
If you answered “no” to any or all of these questions, now might not be the right time to apply for a personal loan. That doesn’t mean never, though. Take steps to improve your credit, or figure out a new month-to-month budgeting plan.
Once you reorganize your finances, you can revisit deciding if you should get a personal loan.
Alternatives To Taking Out A Personal Loan To Pay Off Credit Cards
A personal loan isn’t the only way to get out of credit card debt. Consider some of your other options below:
Take Out A Debt Consolidation Loan
Personal loans aren’t the only options for debt consolidation. A home equity loan is similar in that you receive a lump sum of money with which you can pay for a large purchase, or in this case, pay off credit card debt. Unlike a personal loan, however, a home equity loan isn’t unsecured. Since you’re borrowing against the equity of your home, your home is offered up as collateral to secure the loan. This means if you default on the loan, you could lose your home through foreclosure.
Similarly, a home equity line of credit (HELOC) allows you to borrow against your home’s equity as a form of revolving debt, much like a credit card. As with a home equity loan, your home is used as collateral, and you risk losing it if you can’t make your monthly payments.
Apply For A Balance Transfer Card
Getting a balance transfer can consolidate your credit card debt in a similar way as a personal loan. A balance transfer card can allow you to move the collected balances of all your credit cards onto a single new card that you can then pay off month-to-month. Some lenders will offer a 0% APR introductory period, too, and if you can repay your entire balance within this time frame, you could save yourself a lot in interest charges.
That doesn't mean everything is free, though. You’ll pay a balance transfer fee of 3 – 5% of your transferred amount, and possibly annual fees – with interest – after that. Additionally, a typical introductory period can last 12 – 18 months, and if you can’t repay your full balance within that time, you’ll then be paying your new card’s APR.
Make Additional Payments
If you want to tackle your mountain of credit card debt yourself, without the help of a loan, you should be prepared to pay a little extra month-to-month.
When you get your monthly credit card statement, it’ll tell you what your current balance is and request a minimum amount for you to pay. If you’re financially able to, put a little more toward each monthly payment. That should speed up the process of paying your balance down. Only pay what you can afford, though.
If you have multiple credit cards, there are a couple strategies you can consider using to pay them off one-by-one. You can adopt the avalanche method, wherein you target your cards with the highest interest rates first. This method could save you a lot in interest down the line.
The debt snowball method encourages you to focus your extra payments on your cards with the smallest balances first. This can be a rewarding method for those in debt, as it can offer faster results by letting you see your smaller debts disappear before your eyes. If your cards with the lowest balances also have the highest interest, all the better!
Again, only make additional payments if you can afford to do so, or you could end up draining your finances.
Try Debt Settlement
You can also try talking with your creditors and negotiate a debt settlement, or do so through a debt settlement company. If successful, your credit card provider might be willing to forgive a portion of the debt you owe. Keep in mind, though, if you have multiple cards, you’ll have to individually negotiate with each provider, and not all of them may agree to forgive your debt.
Working with a debt settlement company can be expensive, too. They charge various fees, and you can expect to pay 15 – 20% of your total debt trying to settle it. A company might also suggest you stop making monthly payments to your creditors while the negotiations take place, which can damage your credit score. This can be especially bad if your providers refuse the settlement in the end.
Whether you’re considering using a personal loan to pay off your credit card debt, or an alternative option, there’s going to be a lot to think about first. Taking out a loan may feel like trading one debt for another, but consider your situation and decide if you’ll be saving money in the long run. Even just simplifying your monthly payments can count for a lot.
If you’re curious what rates and terms you could qualify for with Rocket Loans, apply online today to prequalify.
*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
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