Should You Get a Loan to Pay Off Credit Card Debt?
While taking out more loans isn’t the best idea when you’re in a bunch of debt, taking out a personal loan to pay off credit card debt could help better your financial life. Even though you’re technically moving a few debts from one form to another, doing so can save you a bunch of money throughout the lifetime of your loan.
Before signing on the dotted line, make sure to weigh the pros and cons of taking out a personal loan to consolidate your credit card debt. Keep reading to find out what exactly is a personal loan, whether you should take one out and how to do so.
What is a Personal Loan?
A personal loan allows borrowers access to money to use for almost any purpose. They’re typically unsecured which means you don’t need to put down any collateral to take out the loan (unlike auto or home loans where you could lose your asset if you fail to pay your loan back on time).
You apply for a personal loan much like you with other types — you fill out an application form and the lender will look at factors such as your income and credit score before deciding if you’re creditworthy enough and what loan terms to offer you. If you’re approved, you’ll typically receive the funds in one lump sum — some lenders will deposit money as quickly as one business day.
A popular use of personal loans is using it consolidate credit card debt because personal loans tend to have lower interest rates. You’ll use the money disbursed from your personal loan to pay off all your credit cards then pay off the personal loan over the agreed timeframe. Doing so can save you money and give you the ability to pay off your debt more quickly.
Is it a Good Idea to Take Out a Personal Loan to Pay Off Credit Card Debt?
Here are a few scenarios where it could make sense to take out a personal loan to pay off credit cards:
You want to lower your monthly payments – Using a personal loan can generally lower your monthly payments, freeing up some cash flow in your budget. This is particularly helpful if you’ve been struggling with making the minimum payments on your credit cards. Of course, you’ll need to sit down and crunch some numbers to see if it’ll really help, but in many cases you could find that a personal loan’s monthly payment can be lower than all of your credit card payments combined.
You want to pay off your debt faster – If you can free up some room in your monthly budget if you lower your monthly payments which you can use towards the principal. For example, let’s say you’re now paying $300 a month instead of $450 in combined credit card debt. You can take the extra $150 towards the personal loan principal, getting you out of debt quicker. Make sure to check the fine print so you’re not subject to any prepayment fees or else it might not be worth it to pay off your personal loan early.
You want to simplify your payments – Those who have a lot of credit card debt might find it hard to manage all the payments, especially if all of them have varying due dates and amount of minimum payments. Consolidating all of them into one personal loan helps to simplify things. You’re only responsible for one monthly payment, which can help you feel less stressed compared to juggling different bills.
You have good to excellent credit – Lenders tend to give the lowest rates to borrowers who have the best credit scores. That means if you don’t have a great credit score, it might not be much lower than your current credit card interest rate. In other words, if you can qualify for the lowest rates, it could be worth making the switch.
When Should I Avoid a Personal Loan to Consolidate Credit Card Debt?
You can’t control your spending problem – Consolidating your debt isn’t going to solve your financial problems. If you keep spending the way that landed you into consumer debt in the first place, then a personal loan is only a temporary solution.
You still intend to use your credit cards – Your efforts to simplify your payments will go out the window if you’re still going to use your credit cards. That way you’re still juggling multiple payments and risk paying high interests if you plan on carrying a balance on your credit card.
You have excellent credit – In some cases, getting another credit card might be the better option. Some credit cards offer a 0% introductory APR period. That means you can transfer your existing credit card balance to the new one and potentially not pay any interest, assuming you pay off the entire balance within the introductory period. Keep in mind that your new credit card may charge you a balance transfer fee, so do some calculations to see if doing so will save you money.
You won’t save money overall because of fees – Some personal loan companies charge origination fees, which is money you’ll pay for the lender to process your loan. This fee is typically rolled into your APR. That means even if you could get a lower interest rate, the origination fee could end up costing you more than what you’d pay for your credit card balances. Again, do some calculations to see which option works out in your favor.
How do I Take Out a Personal Loan to Pay off Credit Cards?
Let’s say you’ve gone through all the pros and cons and decided to take out a personal loan. Different lenders may have different requirements, but generally, here’s how the process works:
- Apply for a personal loan by submitting information such as your Social Security number, income, amount you want to borrow
- You’ll be presented with a loan offer which includes your rate and repayment term. You may be able to modify the terms like your term or monthly payment amount.
- If you agree to the terms you could be asked to submit additional documentation and sign the loan documents.
Some lenders may let you see what you pre-qualify for. Meaning you don’t need to fill out an application form and risk a hard inquiry (which can affect your credit score). Don’t forget to shop around to find the most favorable terms and rates.
Using a personal loan to pay off big credit card debt is a personal choice, one that could help you save significant sums of money. It can help you move forward in your efforts to better your financial future, especially if you’ve found a way to better your spending habits.
Even with that major advantage, a personal loan isn’t for everyone. That’s why it’s a good idea to shop around and find out which one is the more budget-friendly option.