If getting out from under credit card debt feels impossible to you, you're not alone. The average credit card interest rate in the U.S. hovers between 17% and 18%, and many card issuers charge more. Here, we'll discuss when using a personal loan to pay off credit card debt makes sense, the pros and cons of using personal loans for debt consolidation, and alternatives to consider.
Use a personal loan to pay off credit cards when the loan interest rate is lower than your credit card interest rate.
Let's say you purchased a new roof for your home using a credit card. The credit card has an interest rate of 17%. With interest piling up, it feels like you'll never pay it off. Then, you find out you can get a personal loan with an interest rate of 7.99%. You decide to get a loan, use the money from the loan to pay off your credit card, and then pay back the loan. You'll pay less in interest this way.
That's debt consolidation. Debt consolidation means taking out a personal loan to pay off your other debt. Then, you pay back the loan (which usually has a lower interest rate than, say, credit cards).
Here's an illustration of how much time and money you could save by using a personal loan to consolidate your credit card debt.
|Debt||Interest Rate||Payment||Time to Repay||Total Interest|
|Credit Card||$15,000||17%||$450||46 months||$5,444|
|Personal Loan||$15,000||7.99%||$470||36 months||$1,919|
If you consistently pay $450 toward the credit card debt, it will take 46 months to pay it off, and you'll spend $5,444 on interest.
If you could snag a lower-interest personal loan at 7.99%, the debt can be paid in 36 months, and you will pay a total of $1,919 in interest. That's a savings of 10 months and $3,525.
Yes -- if a personal loan offers a lower interest rate and saves you money, it is better than credit card debt.
With most personal loans, the amount you pay each month stays the same. These are what's called "fixed installment" loans. While it may feel tough sometimes, making this fixed monthly payment gets your consolidation loan paid off at a steady clip.
With credit cards, the monthly payment can change. The "minimum due" on a credit card is usually a percentage of the balance. As interest accumulates, the balance changes, so the monthly payment changes as well.
Pro tip: Making fixed payments (like with a loan) reduces the time it takes to pay off debt -- and saves you money, too.
Before you decide to use a personal loan to get rid of your credit card balance, take a look at this rundown of pros and cons.
Pro tip: If you struggle with overspending, a credit counselor can help. Talk with one before you decide to take out a loan, in case there are better options that can help you move toward financial freedom.
If you shop around and find that using a personal loan to pay off credit card debt will not save you money, you need an alternative. Admittedly, none of these alternatives are easy -- but each is proven to work.
If you're looking at personal loans because you're having trouble making your regular credit card payments, call your creditors and let them know what's going on. Be honest about the issues, and ask them to work with you. They may lower your interest rate or forgive part of the debt.
It's important to note that if your creditor lowers your interest rate or settles the debt for less than owed, the agreement is reported to the credit bureaus and impacts your credit score. Debt settlement of any kind can remain on your credit record for seven years. Still, if you've been late on payments or are making partial payments, your credit score has already been negatively impacted. It's important to stop the bleeding and begin building stronger credit.
Pro tip: If your problem is not overspending, but poor credit, it is possible to get a personal loan with bad credit.
If credit card debt is causing you sleepless nights, and you think your budget may have some room for improvement, that's the first place to look. Any cuts you make (even small ones) can be diverted to your credit card debt, helping you get ahead of interest and pay it off faster. You don't necessarily have to cut anything out of your life entirely, but consider trimming your spending until your credit card debt is repaid. Here are some of the simplest ways to begin:
If you're struggling with debt, you have undoubtedly already considered earning more money. Here, we'll cover a few ideas that won't eat up all your spare time, but will add extra cash to your monthly budget:
If you decide a debt consolidation loan is your best path to becoming debt free, you can get started easily. Here's a quick rundown of the steps. For more info, check out our full guide on how to get a personal loan.
Order a free copy of your credit reports. One in five Americans finds at least one mistake. Even one can pull your credit score down, so carefully go over your three reports -- from Experian, TransUnion, and Equifax -- making sure the information is accurate. If you find a mistake, let the bureau in question know. They have 30-45 days to prove the information correct or remove it from your report. If it seems like a hassle, remember that the best loan interest rates and terms go to borrowers with the strongest credit.
Shop lenders. Everything, from minimum credit score for personal loans to interest rates and terms, varies by lender, so apply with several. The best personal loan lenders run a soft credit check to see what you qualify for (that doesn't impact your credit score). Once they've run a soft check, they tell you what your interest rate will be with them. It's only when you move ahead with a lender that there's a hard credit check. This check puts a small dent in your credit score, but it rebounds quickly with regular monthly payments.
Provide documentation. After a lender runs a hard credit check to verify all your information, there's usually a request for documentation. You may be asked for things like identification, pay stubs, or tax returns. The faster you provide the lender with these, the sooner you get your loan.
Sign loan documents and wait for funding. Personal loan lenders take anywhere from one business day to several weeks to deposit funds into your bank account, so be sure to ask about it as you shop lenders.
Pro tip: To save time, gather proof of identification, information about your employer, pay stubs, and last year's tax returns before applying for a loan.
Debt consolidation with a personal loan can be a faster, cheaper way to pay off your credit card balances. Before you take on a side hustle, cut expenses, or take out a personal loan for debt consolidation, think about what will work best for you.
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Yes, you can pay off credit card debt with a personal loan for debt consolidation. If the interest rate on the personal loan is lower than the rate on the credit cards, you will save money and time.
When the interest rate on the personal loan is lower than the interest rate on the credit cards.
No -- you might see a temporary dip when you first apply for a loan, but after that, your credit score should start to rise (as long as you make your loan payments on-time). And if you stop using your credit cards, your credit score is likely to rise even more.
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