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Facing credit card debt? Taking out a personal loan is one option for tackling it.
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.
But a personal loan isn’t your only option to consolidate your credit card balances. You can also apply for a balance transfer credit card, apply for a home equity loan or take out a retirement account loan, for example.
Every debt consolidation option comes with its own pros and cons, so read on to learn whether a personal loan might be the best choice for you.
Taking out a loan to pay off credit card debt
- When does it make sense to use a personal loan to consolidate your credit card debt?
- What are the potential drawbacks of personal loans?
- What other debt consolidation options do you have?
When does it make sense to use a personal loan to consolidate your credit card debt?
Personal loans — which can be used as debt consolidation loans, depending on the lender — tend to offer lower interest rates than credit cards. So, if you’re juggling multiple credit card payments per month and paying high interest rates on that debt, it makes sense to consolidate your credit card debt into a single personal loan with a lower interest rate than what you’re currently paying.Six best debt consolidation loans
But keep in mind that most lenders typically have minimum loan amounts of $1,000 to $5,000. Because of this, personal loans may only be a good option if your debt lands within that range.
What are the potential drawbacks of personal loans?
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,” says Shannon McLay, founder of financial services company The Financial Gym.
So while you may save money on interest, your overall payments could be higher and present a cash flow issue. And as McLay notes, if you miss payments on your personal loan, it will most likely negatively affect your credit scores.Use a loan calculator to see how much your loan payments might be.
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 (generally 6% or less) of the total loan. This fee may be included in the loan amount though — 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.
What other debt consolidation options do you have?
Beverly Harzog, credit card expert and author of “The Debt Escape Plan,” offers an alternative to personal loans for paying off debt.
“If you have excellent credit scores, you may be better off getting a balance transfer credit card that offers a 0% introductory APR,” Harzog notes. “This way, you can pay off the debt without paying interest.”
Of course, this is only true if you pay off your balance before the introductory APR period expires.
If your credit prevents you from qualifying for an introductory 0% APR, a personal loan may be a good option. But keep in mind that you still have to meet the lender’s qualifications.
“Your goal is to get an interest rate lower than the one you’re currently paying on your credit cards,” Harzog says.
Other debt consolidation options include applying for a home equity loan, taking out a retirement account loan or applying for a cash-out auto refinance. Be sure to weigh the pros and cons of each so that you pick the best option for your situation.Learn more: Seven ways to consolidate credit card debt
Taking out a personal loan to pay off credit card debt is an alternative that could save you money over time.
It may also help you simplify what seems like an overwhelming burden so that you can better focus on rebuilding your financial situation — and on establishing healthier spending habits, if that’s been an issue.
But it’s important to read the terms and conditions, look for costly fees and ask a lot of questions. And if you decide to take out a personal loan to pay off your debt, look for a reputable lender.
“It’s a good idea to check with a local credit union or your own community bank and see if you can get a personal loan that way. There are also loan comparison sites that can help you find the best rates. When you choose a lender, check the Better Business Bureau to see if there have been any complaints,” Harzog says.
In short, a personal loan can be a viable option to pay off credit card debt, but it’s important to do your research and ensure that it makes financial sense for you in the long run.
Your credit card debt relief options during COVID-19
If the financial impact of the coronavirus pandemic has you thinking about consolidating your credit card debt, you’re not alone — and you may have additional avenues for financial relief.
Below are links we’ve compiled on relief measures that some credit card issuers, other creditors and the government have announced to help people during this time. Check out these summaries to look for measures and creditor programs that could apply to your situation.
Government relief measures
Loan and credit card relief measures
- Coronavirus auto loan payment and debt relief: What some auto lenders are doing to help
- Coronavirus: Mortgage debt relief programs for homeowners
- Coronavirus credit card payment and debt relief: How issuers are responding to COVID-19
- Coronavirus student loan payment and debt relief: What lenders are doing to help
General advice for paying down debt
If you’re looking for general tips on how to budget or navigate your credit card debt, we can help you with that too. Check out some of our advice articles below.