Pros and Cons of Using a Personal Loan to Pay Off Credit Card Debt

Your credit cards were there for you in a financial pinch—but now you've got a balance that’s tough to pay off. A lot of us have been there. You might get rid of it on your own over time, or you might need to explore options like debt relief or debt consolidation.

Debt consolidation is when you take out a new loan—often a personal loan—to pay off multiple smaller debts. This reduces the number of monthly payments you have to make and, in many cases, gets you a lower interest rate on your debt. You don't have to worry about your balance ballooning any further, provided you make your payments on time and avoid new charges on your credit cards.

Taking out a personal loan to pay off credit card debt could save you a lot of money in interest and set your mind at ease. But like all debt solutions, it has its pros and cons. Understanding how a credit card debt consolidation loan compares to other debt relief options is key to deciding whether it's the right move for you.

If you hope to save the most money possible on a debt consolidation loan, you need to find the personal loan provider offering the best deal. Fortunately, you don't need a finance background to do any of this—you just need to be willing to do a little research.

When Is a Personal Loan Right for Your Debt Situation?

Using a personal loan to pay off credit card debt could be a smart option for you if the following things apply:

• You're not at risk of running up new debt. A debt consolidation loan can only resolve your debt problems if you can avoid racking up new debt on your credit cards.

• You have thousands of dollars in credit card debt. Most personal loan providers require you to borrow $1,000 or more at minimum. 

• You want to simplify your debts. Personal loans can make tracking payments much simpler, especially if you're currently carrying debt on multiple cards.

• You have a steady income. Lenders want to know you have a means of paying back what you borrow.

• You haven't taken out loans recently (and don't plan to take any out soon). Taking out too many loans can raise red flags with creditors, who see this as a sign that you might be living beyond your means.

• You can qualify for a lower interest rate on a personal loan. Personal loans generally have lower interest rates than credit cards, but that depends on your creditors, your loan terms, and your credit score.

• You don't want to or can't put up collateral. Personal loans tend to have higher interest rates than home equity lines of credit (HELOCs) or other types of loans backed by collateral (physical property the creditor can take and sell if you don't keep up with your payments).

It's worth taking a closer look at the pros and cons of a personal debt consolidation loan before you make your decision.

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Summary: Pros and Cons of Using a Personal Loan to Pay off Credit Cards

Here are the major pros and cons of taking out a personal loan to pay off credit card debt:

5 Benefits of Using Personal Loans to Pay off Credit Cards

Taking out a personal loan to pay off credit card debt can offer advantages. If you're considering this option for paying off debt, it's important to consider how it might benefit your financial situation. 

1. Lower interest rate

Taking out a personal loan to consolidate credit cards could save you money if the loan has a lower interest rate than the rates you're paying on your cards. Personal loan interest rates average about 12%, while credit card interest rates average about 24%. The savings could be significant, especially if you have a very good or excellent credit score, which usually qualifies you for the lowest interest rates on personal loans. If you think a personal loan could be right for you, check with a few lenders to see what kind of interest rate and loan term they'll offer you.

2. No interest rate surprises

Personal loans typically have fixed interest rates—your rate stays the same over the life of the loan. Credit cards, on the other hand, usually have variable rates. When rates go up, you pay more interest if you carry a balance. Choosing a fixed-rate personal loan to pay off credit card debt means you don't have to worry about rate hikes.

3. Simplified payments

Using a personal loan to pay off credit card debt can make budgeting easier, since you could reduce multiple payments down to just one. You can also schedule automatic payments, eliminating the stress of tracking due dates. 

4. Lower monthly payment

The monthly payment on a personal loan—which depends on how much you borrow, your interest rate, and the loan repayment term—might be lower than the total of the minimum monthly payments for all of your credit cards. That could help you create some wiggle room in your budget. 

5. Possible credit score improvement

Your credit-utilization ratio has a big influence on your credit score. To find yours, compare your credit card balances to your credit limits. If you have a $500 balance on a card with a $1,000 limit, your utilization ratio on that card is 50%. You have a credit-utilization ratio for each card, and one for all the balances combined.

This ratio doesn't take into account your balances on installment debt—debt with a regular monthly payment. For instance, if you have a car loan, it’s not reflected in your credit-utilization ratio.

Using a personal loan to pay off your credit card debt could reduce this ratio, and therefore raise your credit score. The trick is to avoid putting new balances on those paid-off cards.

Calculating Your Potential Savings

Your potential savings with a personal loan for debt consolidation varies depending on how much you borrow, the loan terms and interest rates you qualify for, and your credit score. Here's one example to give you some idea of what to expect.

Let's say you have three cards with balances:

That gives you an average interest rate of 26.5%. If you pay $300 per month toward your credit card debt, it would take you about 8.5 years to pay it off—assuming you don't encounter any late fees, or add to your balance along the way. You pay about $18,330 in interest during that time.

Now let's say that instead of doing this, you take out a personal loan with a five-year term and an 18% interest rate. You use the loan to pay off your $12,000 balance. Your loan payments are $305 per month, and you're out of debt 3.5 years sooner. You pay around $6,300 in interest over the lifetime of the loan. That's a savings of over $12,000 for total costs.

This is only an example, so your savings could look different. If you have good credit, you could qualify for even lower interest rates on personal loans, which could lead to greater savings. Having fair or poor credit may qualify you for a personal loan with higher interest rates, resulting in lower savings.

4 Drawbacks of Using Personal Loans to Pay off Credit Card Debt

Using a personal loan to pay off credit card debt isn’t right for everyone. There are some potential disadvantages to consider before moving ahead with a debt consolidation loan. 

1. No guarantee of lower rates

Lenders reserve the best interest rates for borrowers with the highest credit scores. If your credit score isn't good or excellent, you might end up with a rate comparable to what you're already paying on your credit cards. 

2. Fees

Lenders can charge personal loan fees that add to your total cost of borrowing. Some of the fees to look for include:

• Application fees. Some lenders charge a (usually modest) fee to apply.

• Origination fees. These are typically 2% to 8% of the total loan amount, and are deducted from the funds before they are disbursed to you.

• Late payment fees. You could pay these if the lender doesn't receive your payment by the due date.

• Prepayment penalties. These apply when you pay a loan off ahead of schedule. 

Not all lenders charge all of these fees for personal loans, but before you sign the loan paperwork, know what fees you might pay. 

3. Possibility of paying more in interest overall

Choosing a longer loan term can lower your monthly payments when you use a personal loan to consolidate credit card debt. The longer you take to pay off the loan, however, the more interest you pay overall. 

4. Risk of increasing your total debt

Using a personal loan to consolidate credit cards can work in your favor, but only if you don’t use your cards to make new purchases. 

If you pay off your cards using the loan and then charge them up again, you're not improving your financial situation. In fact, you could create a deeper debt hole.

To make a personal loan for debt consolidation work well, you have to change your spending habits over the long term. This might include reducing spending, sticking to a budget, or using cash rather than credit cards.

Find a plan that you can stick to in future—one that, ideally, helps you save some money in an emergency fund. This way, you can handle unplanned expenses without relying upon credit cards and restarting the debt cycle.

How to Find the Right Personal Loan for Debt Consolidation

Here are the basic steps in finding the best personal loan for credit card debt consolidation.

Gather information

The first step is to understand your debt situation and determine if a personal loan is your best option. Make note of the balances and interest rates on all of your credit cards. You may also want to check your credit score to get an idea of where you stand. Your credit card issuer may give you access to free credit scores. You can also order them from the three credit bureaus (Equifax, Experian, and TransUnion). Ideally, look at your FICO Scores, because these are the scores lenders most commonly use.

You'll also need to gather some information, including:

• Your Social Security number

• Proof of identity (birth certificate, driver's license, passport, etc.)

• Pay stubs

• Tax returns from the past couple of years

• Proof of address (utility bill, lease or rental agreement, etc.)

• Bank routing and account numbers

You'll also need some or all of this documentation to apply for a personal loan.

Compare rates

Get pre-qualified with three to five personal loan lenders. A prequalification helps you get a rough idea of what a lender might approve you for without the hassle of filling out a full loan application. However, it's not an iron-clad guarantee that you’ll get the loan. 

You usually have to provide your annual income and desired loan amount. You may need to give your Social Security number so the lender can check your credit. Be sure the lenders check your rate with a soft inquiry that doesn’t affect your credit score. 

Loan terms vary depending on your credit score and how much you're looking to borrow, among other things. It's possible to get a personal loan without perfect credit, and it could still lead to significant savings. For example, if you have a credit card with a 26% interest rate and your personal loan is at 18%, that's still likely to be a worthwhile deal.

While the monthly payment and interest rate are big concerns, pay attention to associated fees and how much you'll pay in interest overall. 

Apply for the loan

Once you've decided which personal loan company you'd like to work with, submit a full application. Applying for a loan impacts your credit score (because the lender performs a hard credit inquiry), but it usually means losing only a few points. 

It typically takes a few business days to a couple of weeks to process your application. If you're approved, you usually have the money in your account within a week. Some lenders offer same-day funding, so this is something to look for if you need cash quickly.

Pay off your credit cards

As soon as the lender deposits the personal loan funds into your account, pay off your credit card bills. Credit card interest accrues daily, so the quicker you do this, the less you pay in interest overall.

It's quickest if you make the payments online. If you mail a check, there's a chance your balance may accrue more interest while the check is in the mail, which means you may still have a small balance even after your creditor deposits the check. 

Follow up with your creditor and make sure your balance is zero. If it's not, knock out the remainder as quickly as possible. 

Adjust your budget for the personal loan payment

Once you know how much your new personal loan payment will be, make sure you’re setting aside enough money for it in your budget. Consider setting up automatic payments from your bank account so you don't miss a due date. You can also pay extra if you have the cash. But first, double check that there's no prepayment penalty.

Depending on how you use them, it may be okay to use your credit cards during this time. If you do, be very careful about what you charge—don't charge more than you know you can pay back at the end of the month. Otherwise, you'll wind up with new credit card debt. If you can reduce your spending, that's all the better. You can put the extra money toward paying off your personal loan more quickly.

Personal Loan Alternatives Comparison

Personal loans aren't the only way to pay off credit card debts. Here are other options to consider.  

Debt snowball

The debt snowball method is a popular way to pay off credit card bills. Here's how this method works:

• List your debts from lowest balance to highest.

• Pay as much as you can each month to the smallest debt on the list, while paying the minimums on everything else.

• Once you pay off the first debt, roll its payment amount over to the next debt on the list.

• Continue snowballing payments until all your debts are gone. 

The debt snowball can be motivating, because it helps you knock out the first debts quickly. This strategy is convenient, because you don't have to apply for new loans or credit cards. But it’s often not the fastest way to get rid of your debt, and it can result in paying more interest overall. If you’d like to pay off the highest-interest debts first instead of the smallest ones, compare the related debt avalanche method to the debt snowball.

Balance transfer card

If you qualify, balance transfers allow you to move money from one credit card to another, ideally at a lower interest rate. Many credit card companies offer balance transfer cards that let you pay zero interest on transferred balances for a set period. Once that promotional period passes, you pay the normal interest rate on any remaining balance. 

The upside is that you could save big on interest during the promotional period, especially if you're able to knock down the entire debt before the promotional period ends. Most balance transfer cards charge a fee ranging from 3% to 5% of the balance.

The downside is that you might not be able to pay off your balance at the promotional rate. Most balance transfers are for 18 months or less. Then your balance is subject to the card’s normal interest rate, which is probably going to be high.

Balance transfers could be a good one-time strategy, but credit card juggling generally isn’t sustainable long-term. Note that to do this, you need to open a balance transfer card with a creditor you don't already owe. Creditors you currently owe have no incentive to give you a reduced or 0% interest rate.

Debt management plans (DMPs)

Credit counselors can work with you to set up a debt management plan (DMP). They negotiate with your creditors to see if they can lower your interest rate or waive certain fees. Then, you make a monthly payment to the credit counselor, who pays your creditors. There's usually a one-time fee to set this up, and a modest monthly fee for staying on the plan (typically under $50 a month).

This could be a good option if you don't want to take out a new loan or credit card. But it's important to check with your credit counselor to see what your monthly payment would be. If it's not manageable, you may need to explore some of the other options listed here.

Debt settlement

Debt settlement means you offer your creditors less than what you owe, and ask that they consider it full payment. Creditors don't have to do this, but many will negotiate, especially if they think there's a chance you might declare bankruptcy instead.

You can negotiate with creditors on your own, or enlist the help of a reputable company like Freedom Debt Relief to do the negotiating for you. If you opt for the latter, you’ll have to set aside money regularly, and then approve any negotiated offers that come in. This could be a good fit if you don't think you can afford to pay the full amount you owe. 

People who go through debt settlement typically experience serious credit score damage during the process because they miss payments on their debts. Missing payments is likely to lead to collection calls, too.

Bankruptcy

Bankruptcy could work for you if other means of paying off your debts don’t seem to fit. Chapter 7 bankruptcy can erase your eligible debts within a few months, but you may have to give up some of your possessions. There are also income restrictions for this type of bankruptcy. 

Chapter 13 bankruptcy doesn't cost you any of your possessions, but it requires that you make payments to your creditors for three to five years. This may or may not save you money compared to the other methods we’ve discussed.

Bankruptcy also stays on your credit report for seven to 10 years (depending on the type), so this probably isn't your best option if you plan to borrow money again soon.