Personal Loans

Should I Use a Personal Loan to Pay Off Credit Cards?

Credit cards can come with exorbitant interest rates, making it difficult to pay off the debt you carry month to month. Using a personal loan to pay off credit card debt is a common strategy to reduce your overall cost of repayment. That’s because you may be able to consolidate debt with a personal loan at a lower rate. Another benefit is that you can combine the debt from multiple credit cards, reducing the number of bills you have to juggle each month.

Is it a good idea to use a personal loan to pay off credit cards?
Where to get a personal loan to pay off debt
4 alternatives to using a personal loan to pay off credit card debt

Is it a good idea to use a personal loan to pay off credit cards?

The key to figuring out whether it makes sense to sign up for a credit card debt consolidation loan is knowing how much debt you have and deciding on your goals. Ultimately, using a loan to pay off credit card debt can be a savvy move in a variety of scenarios:

  • You have good or excellent credit and want to consolidate debt with a new loan, like a personal loan, with a lower interest rate
  • You want to repay your debt with a fixed interest rate and fixed repayment date (which a personal loan offers)
  • Credit cards have become a problem in your life, and you plan to stop using them altogether

It might not be a good idea when:

  • You don’t think you’d be able to stop using credit cards for purchases you can’t pay off, meaning you’d continue to rack up credit card debt even after consolidating
  • Your credit score is pretty bad, so you can’t qualify for a personal loan with a competitive interest rate
  • A balance transfer credit card, which may come with a promotional APR period lasting 12 to 21 months, would be a more affordable alternative, assuming you can repay your debt in full during the promotional period to avoid any fees or interest charges.

Where to get a personal loan to pay off debt

If you believe you would be better off paying off debt with a low-interest debt consolidation loan, you should spend some time comparing all the options available to you.

The following table can give you an idea of the APR and amounts you may find among personal loan lenders. Each lender below offers a minimum repayment period of 24 or 36 months. Ultimately, your credit health and finances will determine your eligibility for a loan.

Loans to pay off credit card debt
Lender APR range Loan amount Minimum credit score
Avant 9.95% to 35.99% $2,000 to $35,000 600
Marcus by Goldman Sachs® 6.99% to 19.99% $3,500 to $40,000 Not specified
Upstart 8.13% to 35.99% $1,000 to $50,000 600

If you want to receive offers that are personalized for you, you can use LendingTree. As a loan marketplace, you can apply for prequalification and see offers from up to five lenders at once. Prequalification only requires a soft credit check (which doesn’t affect your credit) and can give you an idea of the type of loan terms you may qualify for.

Keep in mind: Prequalification doesn’t guarantee you’ll be approved for a loan when you formally apply.

Alternatives to using a personal loan to pay off credit card debt

Balance transfer credit card with 0% APR offer
Credit counseling
Home equity loan or home equity line of credit (HELOC)
Debt snowball or debt avalanche method

Balance transfer credit card with 0% APR offer

If you have a small enough amount of debt that you could pay it off in less than 18 months, you may want to look into a balance transfer credit card with a 0% APR offer. These types of offers require good to excellent credit and expire within 12 to 21 months. They allow you to pay off your transferred debt for less, assuming you repay the balance in full within that time frame. (If you don’t, you’ll be charged interest from the original purchase.)

Expect to pay a balance transfer fee (usually 3% or 5%) upfront in order to take advantage of these offers. Also, once the 0% offer ends, your card’s rate will reset to the much higher variable interest rate.

Credit counseling

A reputable credit counseling agency may be able to help you create a monthly budget and a plan to pay off debt. Counselors who work in these agencies are trained to understand the intricacies of debt repayment, as well as the top strategies you can use to pay off high interest debt through responsible financial management and budgeting.

With that being said, the Federal Trade Commission (FTC) warns that some credit counseling agencies may not be legitimate, and that some might charge high fees. Make sure to read reviews and compare options before you use a credit counseling agency to get out of debt. The FTC also suggests looking for counseling from a financial institution or a local consumer protection agency you trust.

You may choose to work only with counselors who are certified by the National Foundation for Credit Counseling or members of the Financial Counseling Association of America. These organizations set standards for financial counselors to ensure customer services are of high quality.

Home equity loan or home equity line of credit (HELOC)

If you have a considerable amount of equity in your home, you could look into a home equity loan or HELOC. Both options let you borrow against the equity in your home while using your property as collateral for the loan. However, there are some differences between the two.

A HELOC is a line of credit you can borrow against that comes with a variable interest rate, similar to a credit card. With a home equity loan, on the other hand, you’ll get a fixed interest rate, a fixed repayment period and a fixed monthly payment, similar to what you would get with a debt consolidation loan or personal loan.

Both options may allow you to access credit at a lower overall cost. That’s because these are a form of secured debt, meaning they’re backed by collateral — in this case, your home. That said, if you’d struggle to repay your debt, you should reconsider this option. If you can’t make payments, you could lose your home.

Debt snowball or debt avalanche method

Two common debt repayment strategies are the debt snowball and debt avalanche methods. Each of them have their merits and can help you tackle your debt. In both cases, you’ll make minimum payments on all but one of your debts. Which debt you focus on, however, depends on the strategy you choose.

With a debt snowball, you’ll make higher-than-normal payments on your smallest debt, without regard for its interest rate. Once that debt is repaid, you’ll move onto the next debt. With this strategy, your smallest debts will disappear one by one until you’re left with only your largest debts, then one debt, then none. The main benefit of this strategy is that you’ll have quick wins, helping you stay motivated.

With the debt avalanche method, you’ll pay as much as you can toward your debt with the highest APR. Once repaid, you’ll roll payments over to the next debt, and so on and so forth until your debt is repaid. Compared to a debt snowball, a debt avalanche is the mathematically superior option, since you’ll save more money by paying off debts at the highest APR first. However, you may have to wait longer before you get the satisfaction of crossing a debt off your budget.

 

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