The Pros and Cons of Using a Personal Loan to Pay Off Credit Cards
Are there pros and cons of using a personal loan to pay off credit cards? Credit card debt can feel overwhelming, especially when you’ve got a card with a large balance (or multiple cards with large balances). And as credit card lenders charge high interest, it’s easy to feel like you’re fighting a losing battle with debt. It’s not unusual for credit card lenders to charge 18 or even 20 percent interest. Depending on your balance, that could add up to $100 or more per month!
Unfortunately, there’s not much you can do to change your credit card interest rate. You can ask your lender to lower it – but this is a long shot, at best. You can apply for a low- or zero-interest balance transfer – but if your credit score is on the average to low side, you might not qualify.
Here’s one option you might not have considered: a personal loan. Some folks use personal loans to make home improvements, pay for education, or to help cover big-ticket purchases. And some folks use personal loans as a way to consolidate debt or sidestep high interest rates.
But is it a wise decision to apply for a personal loan? Let’s take a look at some of the pros and cons of this method of debt repayment.
Using a personal loan to pay off debt: The pros
We’ll start with the positive. There are quite a few benefits to this debt repayment strategy, including:
- You’ll pay less interest. You can find personal loans with 8 or even 6 percent interest (compared with 18 to 20 percent on a typical credit card). Of course, your interest rate will vary depending on your credit score – but you’re almost guaranteed to pay less interest on a bank loan. This can help you pay off your debt faster.
- You don’t need spotless credit. Banks and credit unions are often willing to work with folks who have less-than-ideal credit scores. This makes a personal loan a good alternative if a balance transfer is out of reach (balance transfers typically require a credit score in the good to excellent range).
- You can consolidate your debt. A personal loan can help you streamline your debt if you’ve got multiple credit cards. Use your personal loan to pay all of your credit card balances, and you’ll only have one balance from a single lender.
Using a personal loan to pay off debt: The cons
Personal loans have a lot going for them, but there are a few drawbacks to using them as debt repayment tools. Here are a few risks to consider before you take the plunge:
- Your credit score does matter. A personal loan is easier to get than a balance transfer – but this doesn’t mean you’re guaranteed to be approved. A few late payments here and there might not be a deal breaker, but a rock-bottom credit score or a history of non-payment will be problematic.
- You’ll pay a loan origination fee. When you take out a personal loan, your bank or credit union will tack on a loan origination fee, which is typically about 1 to 3 percent of the amount you borrow. To put this into perspective, if you borrow $10,000, a loan origination fee of 1 percent would be $100; a fee of 3 percent would be $300. While this isn’t a huge amount, relatively speaking, it’s good to keep in mind.
- You aren’t addressing the cause of the problem. A personal loan will knock out your credit card balances and help you save money on interest – but it won’t fix the spending issues that got you into debt in the first place. If you don’t actively change your habits by saving and budgeting, you’re at risk of getting into debt again.
The bottom line
So, should you take out a personal loan to pay off your credit card debt? The answer is a solid… maybe.
There are certain advantages to this strategy: You’ll definitely save on interest payments, which means you can pay off your debt faster. But you’ll need decent credit to qualify for a personal loan. And you’ll need to make some lifestyle changes and get serious about budgeting and saving – or you might end up back in debt again.
Feeling overwhelmed by credit card debt? Looking for advice and guidance from experienced, caring professionals? Reach out to the friendly folks at American Credit Foundation today. We’re here to help!