In an ideal world, you wouldn’t need to take out a loan to consolidate and pay off your debts, but in the real world, sometimes debt is the only solution.
This is mainly due to high credit card interest rates. As of September 2024, the average APR (annual percentage rate) for a credit card is 20.78%, forcing consumers to pay a lot of interest. Because of this, a small amount of the minimum payment actually goes towards paying off the credit card balance.
Because of these challenges, many people consider consolidating their credit card debt into a personal loan.
When to use a personal loan to pay off credit card debt
Debt consolidation is when you take out one loan to pay off multiple debts. Sure, consolidating your debt with a personal loan means exchanging one type of debt for another. But there are benefits to this strategy — but only if you qualify for a personal loan with an affordable interest rate and fair terms.
Lower interest rates may apply
To get the best personal loan rates and terms, you’ll usually need a FICO score of 800 or higher. However, if your score is 670 or higher, you’re likely to get a competitive (meaning, closer to average) interest rate.
Either way, the average APR for a personal loan is 12.42 percent as of September 2024. This is significantly lower than the current average credit card APR of 20.78 percent, meaning you could save a lot on interest.
You can consolidate your debts into one payment
If you have multiple credit cards, each with its own payment amount and APR, it can be difficult to come up with a debt repayment plan. You need to make sure you make your payments every month and pay the maximum. Paying off your debt with a personal loan can help you eliminate multiple payments and reduce them to one monthly payment, ideally lowering your APR significantly.
Consider using a debt repayment calculator to determine how quickly you can pay off your debt with a lower interest rate.
Consider this simple example: Say you owe $5,000 on a credit card with a 17 percent annual interest rate, and $7,000 on a second credit card with a 21 percent annual interest rate. You can only pay $100 per month on each credit card, for a total of $200 per month.
At this rate, you’ll never pay off your debt because you’re not paying off the entire interest amount. If you could pay off your total credit card debt of $12,000 with a personal loan at 10 percent APR, you’d be paying $200 a month back and paying off more than the interest amount each month.
You can keep your monthly payments low
If you’re struggling with credit card debt and your monthly payments are outstripping your income, a personal loan with a lower APR and set repayment schedule may be just what you need.
A lower APR and a long enough repayment term could result in lower monthly payments on the consolidated debt. To know for sure, you’ll need to try our debt consolidation calculator.
I want to know exactly when I will be debt-free.
The big problem with credit cards is that if you keep using them to make purchases, you may never pay off your debt. Personal loans, on the other hand, come with a fixed interest rate, fixed monthly payments, and a fixed repayment schedule, with an exact date by which you will pay off your debt.
If you’re tired of paying off your credit cards but can’t seem to make progress, consolidating your debt with a personal loan and then switching to cash or a debit card may be the way to go.
When to avoid using a personal loan for credit card debt
Taking out a personal loan to pay off your credit cards can be a way to save money, but that’s not always the case. Signs that you might want to try a completely different debt consolidation method vary from person to person, but some signs include:
I have a small amount of debt that I can pay off right away.
If you have a relatively manageable amount of debt that you can comfortably pay off within 12 to 21 months, consider applying for a balance transfer credit card rather than a personal loan to pay off your debt. 0 percent APR credit cards often guarantee no interest on balance transfers for up to 21 months, although balance transfer fees may apply.
Balance transfer fees can be up to 3 to 5 percent of the transferred balance, but you can easily save hundreds of dollars or more in interest if you pay off your debt during the initial offer period. Some balance transfer credit cards offer rewards and consumer benefits, so be sure to compare offers.
You’ll continue to have the same spending habits
If most of your credit card debt comes from bad spending habits, consolidating your debt won’t stop it from growing if you continue your bad spending habits.
Before consolidating your debt, you might want to rethink your financial strategy to get your spending under control. Consider talking to a personal finance coach or learning about different budgeting methods. Find what works for you and develop long-term debt-free habits before addressing the symptoms of a larger spending problem.
People who desperately need help paying off their debts
Finally, you may have so much debt that you feel like you can’t pay it off without help. In this situation, working with a debt relief company or a nonprofit consumer credit counseling service may be your best bet. You can also consider a debt management plan or debt settlement plan, but the Federal Trade Commission (FTC) warns that not all third-party companies offering debt relief assistance can be trusted.
If you have so much debt that it seems mathematically impossible to pay it off over your lifetime, you may be a candidate for bankruptcy. Before making a decision, it’s a good idea to meet with a CCCS counselor. The FTC recommends verifying any agency you’re considering with your state attorney general and local consumer protection agency to weed out bad actors.
Other options for managing credit card debt
Taking out a personal loan to pay off credit card debt can be beneficial, but it’s not the best choice for everyone. Alternatives include:
Conclusion
Imagine never having to pay off a credit card again, or actually having money to take a vacation or do something fun. Focusing on paying off debt can increase the amount of free cash you have each month, even if your main goal is simply to save up some extra money.
Personal loans can be a great way to consolidate your debt, but be sure to explore all of the options and tools that may be available to you.
To get out of debt, you need to stop letting bills pile up that you can’t pay. No matter which debt reduction option you choose, stop using your credit cards while you’re in debt payoff mode and switch to cash or debit cards.
