Should You Use A Personal Loan To Pay Off Credit Card Debt?
Miranda Crace8-Minute Read
UPDATED: November 28, 2023
Keeping up with your credit card payments is important. But if you’re juggling multiple cards and balances at once, repaying your debt can become a struggle. To simplify your payments and save money in interest, you could get a personal loan to consolidate your debt.
Let’s walk through the process of paying off credit card debt using a personal loan. Then, we’ll consider the benefits and drawbacks of this repayment strategy.
Personal Loan Vs. Credit Card Debt
A personal loan is a large sum of cash a borrower can use for just about anything within reason. A credit card can function similarly, but it’s a revolving line of credit instead of a lump sum. This means you can borrow money numerous times, up to a certain limit, and funds become available to use as you repay them.
You can also repay both personal loans and credit cards on a monthly basis. A personal loan payment is typically a fixed amount, while your credit card’s minimum payment will depend on how much you spent that billing cycle.
Compared to personal loans, credit cards typically have high interest rates – and it’s possible to even have an annual percentage rate (APR) of 30% or higher. You could get a significantly lower interest rate on a personal loan, especially if you have good or excellent credit. If it’s a fixed interest rate, it’ll stay the same until the loan is paid in full.
Are Personal Loans Good To Pay Off Credit Card Debt?
Personal loans can be a great option for consolidating your credit card debt. As just noted, they typically offer lower interest rates. In addition, personal loans routinely have a longer payback period. You’ll also make one monthly payment on a personal loan, instead of potentially making multiple payments spread among different credit cards.
However, a personal loan may not be the right solution for everyone. Before opting for this strategy, it’s a good idea to confirm your credit score is high enough for you to qualify for a decent interest rate. It’s also worth making sure you can afford the monthly payment amount without falling behind.
How To Use A Personal Loan To Pay Off Credit Card Debt
Next, we’ll take a closer look at the process for consolidating your debt with a personal loan.
1. Apply For A Personal Loan
When you apply for a personal loan, you should first shop around and get prequalified with more than one lender. This way, you can see the rates and loan terms you’ll likely qualify for based on your credit history. Some lenders may offer you better interest rates than others, so shopping around can help you find the best deal. Once you decide on a lender, you can submit a full application.
As for how long it will take to receive your money with a personal loan, it’ll likely be quicker than most other borrowing options. Approval and delivery of a personal loan typically happens in 1 – 7 business days, and some lenders even offer same-day financing where you receive your funds on the day you’re approved for the loan. Rocket LoansSM offers this service.*
2. Pay Off Your Credit Cards
You can apply for a loan amount of $2,000 up to $45,000 with Rocket Loans – and some lenders offer loans as high as $100,000 under special circumstances. 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, you can take a moment to enjoy being debt-free – at least with credit cards.
3. Repay The Personal Loan
Now comes the part where you repay the loan that you used to liquidate your credit card debt. Don’t be afraid, though. You hopefully chose the lender that offered the best repayment terms for your financial situation. You finally have just one monthly debt payment to keep up with, and it probably has a fixed monthly amount and interest rate.
If you’re financially able, you could pay off your personal loan early and save even more money in interest.
4. Be More Careful Using Credit Cards
If you still have a credit card or two that you chose not to consolidate, it’s best to avoid using it too much while repaying your personal loan. That doesn’t mean you have to give your card up entirely, though, since credit cards can be a great way to build credit if used responsibly.
Once your personal loan is fully repaid, it’s okay to start using your credit card again regularly for purchases you know you can afford. You’ll just want to be careful not to fall into the credit card debt you were in before.
Pros And Cons Of Using A Personal Loan For Credit Card Debt
Naturally, paying off your credit card with a personal loan comes with advantages as well as some disadvantages. Let’s consider the pros and cons of using a personal loan to remove credit card debt.
Pros Of Getting A Loan To Pay Off Debt
- You could get a lower interest rate with a personal loan.
- You may have only one fixed 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.
Cons Of Getting A Loan To Pay Off Debt
- If your credit score is low, you’ll still have a fairly high interest rate.
- You could end up with a higher monthly payment than you had with your card.
- If you default on a personal loan, it can remain on your credit report for up to 10 years.
- You may have to pay origination fees when you’re approved for the personal loan.
- If you close a credit card account once you pay off the card balance with your personal loan, your credit score could temporarily drop.
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 these questions:
- Do I have a good or excellent FICO® Score?
- Is my debt-to-income ratio (DTI) fairly low?
- Have I been comfortably able to afford my 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.
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. We’ll break down some of your other options next.
Take Out A Home Equity Loan Or HELOC
A personal loan isn’t the only option for debt consolidation. With a home equity loan, you also receive a lump sum of money you can use for most any purpose you please – and this includes paying off credit card debt.
Unlike most personal loans, however, a home equity loan isn’t unsecured. Since you’re borrowing against the equity of your home, your home is put up as collateral to secure the loan. This means that 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 with a home equity loan, your home is used as collateral, and you risk losing it if you can’t make your monthly payments. Unlike a home equity loan, though, a HELOC is a form of revolving debt, much like a credit card.
Apply For A Balance Transfer Credit Card
Getting a balance transfer can consolidate your credit card debt in a way that’s similar to a personal loan. With a balance transfer card, you can move the collected balances of all your credit cards to a single new card. You can then pay off that card month-to-month.
Some credit card companies offer a 0% APR introductory period, too. If you can repay your entire balance within this time frame, you could save a lot in interest.
This doesn’t mean you’re indefinitely off the hook on paying interest, though. A typical introductory period is 12 – 18 months. If you can’t repay your full balance within that time, you’ll pay your new card’s APR, which is likely to be extremely high. You may also pay a balance transfer fee of 3% – 5% of the transferred amount, plus annual fees with interest.
Make Additional Payments
If you want to tackle your credit card debt without taking on a new loan, be prepared to pay a little extra month-to-month.
Your monthly statement will note your current balance and request a minimum payment. If you can put a little more toward each monthly payment, you’ll pay your balance down faster. Only pay what you can afford, though.
Create A Repayment Plan
If you have multiple credit cards with an outstanding balance, you can use a couple of strategies to pay them off one by one. You can try the avalanche method, which involves targeting your cards with the highest interest rates first. This strategy could save you a lot in interest down the line.
Otherwise, you might go with the debt snowball method where you first pay off the cards with the smallest balances. This can be a rewarding method since it can offer faster results as your smaller debts disappear. If your cards with the lowest balances also have the highest interest rates, that’s even better.
Again, only make additional payments if you can afford them. Otherwise, you could end up draining your bank account.
Sign Up For Credit Counseling
If you feel like you need additional guidance as you pay off your credit cards, you could reach out to a credit counselor capable of helping you design a debt repayment plan or a monthly budget.
Credit counseling services are often available through nonprofit organizations, financial institutions and agencies. Before committing to a counselor, be sure to verify they’re licensed and have experience helping people get out of credit card debt. You can even take an in-person or online debt-management class to learn about various repayment strategies.
Try Debt Settlement
You can also try to negotiate a debt settlement with your creditors or use a debt settlement company in hopes of accomplishing a debt settlement. If successful, your credit card issuer might be willing to forgive a portion of the debt you owe. Keep in mind, though: If you have multiple cards, you’ll need to negotiate with each provider. It’s possible not all of them will agree to forgive your debt.
Working with a debt settlement company can be expensive, too, as you can expect to pay 15% – 20% of your total debt trying to settle it. A company may also suggest that during the negotiations you stop making monthly payments, which can hurt your credit score. This can be especially bad if your card providers ultimately refuse the settlement.
Whether you’re considering a personal loan or an alternative option to pay off your credit card debt, you have plenty to think about. Getting a loan may feel like you’re just trading one debt for another, but if you carefully examine your situation, you may find that you’ll save money in the long run. Just simplifying your monthly payments can count for a lot, too.
If you’re curious about the rates and terms you could prequalify for with Rocket Loans, apply online today.
*Same-day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 PM 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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