Considering a personal loan to pay off credit card debt?
Some personal loans offer lower interest rates than credit cards. So consolidating your credit card debt with a personal loan may save you money on interest and potentially help you get out of debt faster.
Read on to learn about the potential pros and cons of a personal loan for debt consolidation as well as possible alternatives.
Benefits of using a personal loan to consolidate credit card debt
Using a personal loan to pay off credit cards may make sense in certain situations. Here are some of the potential benefits.
Lower interest rates
Personal loans tend to offer lower interest rates than credit cards. And if you have excellent or good credit, you may qualify for an even lower rate. Consolidating your credit card debt into a personal loan with a lower rate could help you save a significant amount of money in interest.
But keep in mind that lenders typically have minimum loan amounts of £1,000 to £5,000. If your debt is below this range, a personal loan may not be the right fit.
Reduced chance of missing a payment
Multiple credit card balances means making multiple payments each month. Consolidating all of your card debt into a personal loan means just one fixed monthly payment to remember. This can reduce the chance that you’ll miss a payment, which can negatively affect your credit score.
Improved credit score
Applying for a personal loan will likely result in a hard inquiry, which can initially ding your credit score. But in the longer term, a personal loan could boost your score in a couple of ways. First, it can increase your mix of accounts. A healthy mix of account types, such as loans and lines of credit, can help build your score.
Second, using a personal loan to pay off one or more credit cards can help improve your credit utilisation rate — your total credit card balances divided by your total card limits. Having a lower credit usage rate (generally, below 25%) can help increase your score.
Downsides of using a personal loan to pay off credit cards?
Your monthly payment may be higher
While your interest rate with a personal loan may be lower than your credit card rates, you may find that the monthly payment for your new loan cuts deeper into your monthly budget. With a fixed-rate personal loan, you’re locked into a set monthly payment for a specific period of time, and this monthly payment may be higher than the minimum payments on your credit cards.
Your loan may come with fees
Another issue to look out for: Fees can add to the cost of your loan and eat into whatever you might be saving on interest. Some lenders charge loan-origination fees for processing your new loan. Typically, the origination fee is a small percentage of the total loan. This fee may be included in the loan amount — which means you’d be paying interest on the fee as well.
Also, watch out for prepayment penalties, which are additional fees that lenders may charge for paying off your loan early.
You could end up in greater debt
If you continue to use your credit cards after taking out a personal loan, you’ll rack up even more debt. Before accepting a loan offer, make sure the monthly payment fits into your budget, and create a plan to avoid using your cards.
What type of loan is best for paying off credit cards?
There’s no one-size-fits-all solution for chipping away at credit card debt. Apart from personal loans, here are some other potential ways to consolidate your card debt.
Balance transfer credit card
If you have an excellent credit score, you may be better off getting a balance transfer credit card that offers a 0% introductory APR. This way, you can pay off the debt without paying interest. Of course, this is only true if you’re able to transfer all of your balances and you pay off your balance before the introductory APR period expires.
Home equity loan
If you own a home, a home equity loan may be an option. With this type of loan, you borrow money by tapping into the equity you have in your home. While a home equity loan may come with a lower interest rate than a personal loan, you risk losing your home if you can’t repay the loan.
Frequently asked questions about getting a loan to pay off credit card debt
Can I borrow money to pay for my credit card?
Yes, a personal loan for debt consolidation may be able to help you pay off your credit cards while saving on interest. You may also be able to borrow money in the form of a balance transfer card.
Is it a good idea to take a loan to consolidate credit card debt?
Like many financial decisions, there are pros and cons when it comes to taking out a loan to consolidate credit card debt. A loan may offer lower interest rates than your current debt and a reduced chance of missing a payment. It may even help improve your credit score in the long run. That said, a loan may also come with a higher monthly payment, additional fees, and the possibility of going deeper into debt. It’s important to consider all the information and your specific circumstance before deciding to take out a loan.
Will getting a personal loan to pay off credit cards hurt my score?
Applying for a personal loan to pay off your credit card debt will result in a hard inquiry, which could cause a temporary ding to your credit score. But in the long term, paying down existing debt (and not taking on any new debt) will help reduce your credit utilisation, which has a bigger impact on your score. Lower credit utilisation will help boost your score.
Next steps
If you decide that a personal loan is the right option for you, make sure you do your homework: Check your credit score, compare loan rates, read the terms and conditions, and be on the lookout for costly fees.
If you’re not sure a loan or balance transfer card is a fit for you, consider other ways to pay down your debt.