Should you get a personal loan to pay off credit card debt?

Benefits of getting a personal loan to pay off debt

Taking out another loan to pay off credit card debt may seem counterintuitive, but there are benefits that come with using a personal loan to consolidate debt.

Get a lower interest rate

To find out if you can get a personal loan with a lower rate than what your credit card charges, you can check your potential rate with a personal loan company.

The primary advantage of consolidating credit card debt with a personal loan is the potential to qualify for a much lower interest rate. We say "potential" because the personal loan rate you get will depend largely on your creditworthiness, income and other factors.

The amount you can save in interest by consolidating credit card debts with a personal loan can be substantial. According to the Federal Reserve, the average credit card interest rate worked out to 20.09% in February 2023, whereas the average rate on a 24-month personal loan worked out to 11.48%.

If you have great credit, the best personal loans even offer rates as low as 5.99% (as of publication).

Not only are personal loan rates typically lower than credit card rates, but personal loan rates are usually fixed. This means most personal loan rates will not change over the course of their terms, so you can lock in a loan rate and move forward with your debt repayment plan. By contrast, credit card interest rates usually fluctuate based on market conditions.

» MORE: Interest rates and how they work

Have a set repayment plan

Another pitfall of a credit card is that you can make payments in perpetuity but never pay your balance off if you're still using your card for purchases. If you only make the minimum payment, it can be difficult to make much of a dent in your credit card debt at all, even over the course of several years.

By contrast, most personal loans come with a set monthly payment amount and repayment term. This means you'll know exactly how much you’ll need to pay each month to become debt-free by a specific date.

Keeping track of one fixed loan payment is also much easier than managing several different credit card payments, which Ben Markley of budgeting software YNAB says is a major benefit. In that sense, consolidating debt with a personal loan helps you save money while simplifying your financial life.

Improve your credit score

While applying for a personal loan will result in a hard inquiry that could temporarily ding your credit, a definitive debt payoff plan should offer the following short- and long-term benefits to your credit score:

1. Moving revolving debts from credit cards to an installment loan can substantially improve your credit utilization ratio.
2. You'll build and improve your payment history as you make timely payments on the personal loan.
3. Adding a personal loan to your credit profile can diversify your credit mix. Having a diverse mix of revolving and installment credit positively affects your credit score.

All of these factors combined should help you improve your credit steadily if you resist the temptation to rack up more debt.

» MORE: What affects your credit score?

Downsides of using a personal loan to pay off debt

Using a personal loan to pay off credit card debt can have major financial benefits, but there are also some drawbacks that may come into play depending on your situation. Consider the following before you take out a personal loan for debt consolidation.

You may not get approved for a better offer, or at all

If you’re struggling to qualify for a personal loan because of your credit score, you can ask if the lender will allow a co-signer.

If you have an overwhelming amount of high-interest credit card debt that's negatively affecting your credit score, it might be hard to qualify for a personal loan. If you have a low credit score but still manage to qualify for a personal loan, that loan’s interest rate may end up being as high as the rate on your credit cards.

That said, if you’re struggling to qualify for a personal loan because of your credit score, you can ask if the lender will allow a co-signer.

Your spending habits may not change

Markley says consolidating debt may help your immediate situation, but it might not address the underlying problem that got you in trouble in the first place.

"Paying off credit cards with a loan will not magically change your spending habits or the amount you owe," he said. "In fact, watching that credit card balance hit $0 might give you a false sense of security that produces more credit card spending, which could lead to even more debt."

Fees can apply

According to Markley, a lender might charge you an origination fee for a personal loan, which could take a serious bite out of any interest savings. Note that some origination fees can be as high as 10% of the loan amount that you qualify for, and an origination fee is usually deducted from the loan’s disbursed funds.

As an example, let's say you qualify for a $10,000 personal loan with an 8% origination fee. In this case, you would receive $9,200 in loan funds after the $800 origination fee is taken out. However, you would still be required to repay the full $10,000 loan principal.

How to pay off credit card debt with a personal loan

Before you hatch a plan to pay off credit card debt with a personal loan, you'll want to find the best possible loan you can qualify for. This means looking for a loan with:

• The lowest possible interest rate
• The lowest fees (or no fees)
• A repayment term you can live with
• A monthly payment you can afford
• The loan amount you need to consolidate the debt you have

While interest rates and fees can vary across loan companies, note that you'll typically find personal loans with repayment terms that last from 24 to 84 months. Also, you can usually customize your monthly payment by adjusting the length of your repayment term.

After you have researched a number of lenders and narrowed the options down to those that offer the best terms, it helps to gauge your approval odds for each lender within that small pool. This step can help you plan for the approximate interest rate, loan amount and monthly payment you may be able to qualify for.

After settling on a lender, you can apply online and usually get your loan funds in a matter of days. Once the funds are safely in your bank account, the following steps can help you get out, and stay out, of debt.

Alternatives to personal loans

If you are unsure about consolidating debt with a personal loan, keep in mind that there are other ways to get out of debt. Consider the following alternatives that can also help you save money and/or get out of debt faster.

Balance transfer credit card

Balance transfer credit cards let you consolidate debt at a 0% annual percentage rate (APR) for a period of up to 21 months. However, a balance transfer card charges balance transfer fees (usually 3% to 5% of the transferred amount), and its APR can increase dramatically after the zero-interest period ends.

Home equity products

If you have significant equity in your home, you can consider consolidating debt with a home equity loan or a home equity line of credit (HELOC). These loans use your home as collateral, and they can help you consolidate high-interest credit card debt at a low rate.

Like most personal loans, home equity loans usually have fixed interest rates, fixed monthly payments and a set repayment plan. Meanwhile, HELOCs typically come with variable rates (like credit cards) and base your monthly payment on how much you borrow from your approved credit line.

Debt settlement

You can also consider debt settlement, in which you or a third-party company negotiates with your creditors to settle your debts for less than you owe.

While debt settlement can potentially help you get out of debt faster and save you money, the Federal Trade Commission (FTC) points out that creditors are not required to let you settle for an amount that's less than your balance. And debt settlement companies may ask you to stop making payments on your debts while they negotiate on your behalf. Missed payments can cause considerable damage to your credit score.

Credit counseling

Credit counseling agencies offer free or low-cost financial consultation to those who are overwhelmed with debt. They can also help debtors put together a debt management plan (DMP). A DMP is a type of debt consolidation in which a credit counselor negotiates with creditors to reduce a debtor’s interest rates, waive fees and adjust repayment terms. If the creditors agree to the DMP, the debtor’s debt payments are then consolidated into a single monthly payment made to the credit counseling agency.

A reviewer on our site mentioned that developing a DMP with a credit counseling agency helped them escape short-term stress and long-term debt. Marie from Holyoke, Massachusetts, wrote: “Immediately, creditors stopped calling, and payments dropped. You still get a monthly statement, and I wasn’t opening a bill and seeing it would be paid off in 27 years. I saw that it would be paid off within a four-year period. I could anticipate being debt-free.”

Bottom line

Using a personal loan to pay off credit card debt can be worth it if you can find a loan with favorable terms. While the amount of debt you owe will remain the same, you can save money overall by paying less interest over time.

If you cannot qualify for a personal loan based on your credit score, you may have to look at alternatives like debt settlement or a DMP through a debt relief company. Whatever you do, make sure to research all your options so you can make an informed decision.