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

Using a personal loan to consolidate your credit card debt may help you pay it off faster with less interest

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Cambridge Credit Counseling Corp. and Bankrate
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Credit card debt can seem like a never-ending cycle; you might make the minimum monthly payments for years but see little change in the total balance. Taking out a personal loan to pay off your credit cards can potentially get you out of debt much faster and for less money overall, though.

Key insights

  • You can use a personal loan to combine multiple smaller debts into one account, which is called debt consolidation.
  • Personal loan APRs (annual percentage rates) are generally lower than credit card rates, which can save you in interest over time.
  • Personal loans generally have terms of one to five years, so they can help you pay off your debt faster than making minimum payments on a credit card.

Benefits of getting a personal loan to pay off debt

It might seem counterproductive to take on a new debt to help with a current debt, but there are benefits to getting a personal loan to pay off your credit card balance.

Credit card accounts in 2021 had an average interest rate of 14.6%; personal loans had an average rate of just 9.38%.

The primary advantage is the possibility of a lower interest rate. Credit cards have relatively high interest rates, and this can make paying off your debt difficult. The Federal Reserve reported that credit card accounts had an average interest rate of 14.6% in 2021, while personal loans had an average interest rate of just 9.38% in the same period. If you can secure a personal loan at a lower interest rate than your credit cards offer, it can reduce the overall cost to pay off that debt.

Another pitfall of credit card debt is the length of time it can take to pay off. Low minimum monthly payments can make a credit card look appealing, but it can take many years to pay off the debt that way — sometimes even decades. The term length of a personal loan is usually much shorter, averaging between one and five years.

Downsides of using a personal loan to pay off debt

Using a personal loan to pay off credit card debt can work, but there are also some drawbacks.

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. Or, if you’re approved, the interest rate may be high — possibly as high as the rate on your credit cards. As with most loans, a low credit score usually means a higher interest rate. 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, though.

Another drawback is that the new loan will temporarily increase your overall debt load, and that will negatively impact your credit score. “You are taking on a new debt with no payment history associated with the account and, at least for this account, are utilizing the full loan amount,” explained David Rodriguez, a senior credit expert with The Phenix Group, credit repair company based in Fort Worth, Texas.

While this likely results in a credit hit, the drop in score is usually temporary. “Once payments are made and the balance begins to reduce, you can see the scores rebound,” Rodriguez added. The new debt can also reduce your buying power, he noted.

What to look for in a personal loan

If you decide to use a personal loan to pay off credit card debt, it’s important to find one that makes sense for you and your financial situation. Here are some important things to consider:

  1. Annual percentage rate (APR): The APR is a combination of its interest rate and fees. Make sure the APR for your personal loan is lower than your credit card rate(s), or you could end up paying even more interest with your personal loan. Just know that every lender offers different rates, so it pays to shop around.
  2. Credit score requirements: A lender may require a minimum credit score to get a personal loan, and they often use your credit score to determine the loan amount and interest rate you qualify for. In general, the lower your credit score, the less favorable your loan terms will be. This doesn’t mean you shouldn’t apply for a loan if you have a low score, though. Online lenders and debt consolidation companies often have programs specifically for borrowers with poor credit.
  3. Repayment terms: Repayment terms on personal loans usually range from 12 to 60 months, but shorter repayment terms usually mean higher monthly payments. Balancing these two factors will let you pay off your loan as fast as you can manage and avoid unnecessary interest charges.
  4. Pre-qualification: Getting pre-qualified lets you know what loan terms are available from a given lender. That makes it easier to shop around and compare loan offers. Pre-qualification usually only requires a soft inquiry on your credit report, so it doesn’t affect your score like a full application would.
  5. Loan limits: Some lenders have minimum and maximum loan amounts. For example, if you need a personal loan to pay off $2,000 in credit card debt, a lender with a $3,000 loan minimum wouldn’t be a great fit for you.

Shop around and compare offers from personal loan companies to find the right combination of these factors for your needs.

How do I apply for a personal loan?

There are many places to get a personal loan, ranging from traditional banks and credit unions to online lenders and debt consolidation companies. Which lender is right for you will depend on your preferences, what terms you qualify for, the amount you need to borrow and how quickly you need the money.

Credit mix (the variety of credit accounts you have) accounts for 10% of your credit score, so a personal loan that improves your credit mix usually improves your credit score too.

Traditional banks

There are likely several traditional banks in your neighborhood. Because they have a local presence, banks may require you to come in person to apply for a loan, which can be a drawback for some people. The benefit, though, is access to in-person support if you have questions about your loan.

Banks often require borrowers to have higher credit scores than other lenders ask for, but they also offer some of the lowest rates and highest loan amounts, especially if you’re an existing customer.

Credit unions

You’ll probably have to be a member to borrow from a credit union, but they frequently offer low interest rates to those who qualify.

It’s also worth pointing out that banks and credit unions may not offer pre-qualification, so it can be difficult to comparison-shop for loans from these lenders.

Online lenders

Online lenders generally don’t have physical locations for in-person customer service, and their services often aren’t as personalized.

However, many people find that getting a loan from an online lender is more convenient than with a bank or credit union. Online lenders frequently have options for borrowers with low credit scores, and they tend to fund loans faster than traditional lenders.

Debt consolidation companies

Another option is a debt consolidation company. This type of lender specializes in programs for borrowers overwhelmed by existing debt, often combining credit counseling services with personal loan lending.

A reviewer on our site said working with a credit counseling company that offered debt consolidation was key to their credit recovery.

“I put myself in a hole,” said the reviewer from Tennessee, whose debt had gotten to a point where they were weighing bankruptcy versus consolidation. A credit counselor helped them consolidate their credit card debt under one loan and pay it off over four years.

“I would never have gotten out of that mess by myself,” they said. “The guy who set me up stayed on the phone. He said, ‘Okay, tell me how much you pay for this. Do you get your nails done? How often do you get your haircut?’ Every little thing. Granted they took $50 of the money I paid, but they saved me more than $50 a month in interest just by negotiating my debt. … I don't have the debt hanging over me now. It's a lesson learned. I will never do that again.”

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    Bottom line

    If you can get a lower interest rate and a shorter repayment term, it’s often worth using a personal loan to pay off credit card debt. While the amount of debt you owe is still 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, consider a balance transfer card, using a co-signer or working with a debt relief company.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
    1. Experian, “Consumer Debt Continued to Grow in 2021 Amid Economic Uncertainty.” Accessed June 7, 2022.
    2. Federal Reserve, “Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances.” Accessed June 6, 2022.
    3. Federal Reserve, “Consumer Credit - G.19.” Accessed June 7, 2022.
    4. myFico, “What’s In My FICO Scores?” Accessed June 7, 2022.
    5. Experian, “State of Credit 2021: Rise in Scores Despite Pandemic Challenges.” Accessed June 6, 2022.
    6. Experian, “Average Credit Score Hits New High, While Debt Balances Rise.” Accessed June 16, 2022.
    7. Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit.” Accessed June 9, 2022.
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