Should you take out a loan to pay off credit card debt?

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In a Nutshell

Taking out a loan to pay off credit card debt may help you pay off debt faster and at a lower interest rate. However, you might only qualify for a low interest rate if you have good credit health.

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Brace yourself for an intimidating statistic.

As of November 2017, according to the Federal Reserve credit card debt in the U.S. totaled more than $1.02 trillion.

If you’re one of these Americans with credit card debt, you may be making payments with high interest rates. But instead of dealing with sky-high interest rates, what if you could pay off your debt with a much lower interest rate?

This has to be a fantasy, you might say. But you may be able to do this by using a personal loan to pay off your credit card debt.

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What is a personal loan?

Personal loans give borrowers access to funds to use at their discretion and are typically unsecured, meaning they don’t require you to put down collateral to obtain the loan. This differs from auto loans, where you typically provide collateral — for example, your home or vehicle — that your lender can repossess if you don’t make your payments.

Personal loans are one way you can consolidate credit card debt.

While personal loans may have higher interest rates than secured loans, they often offer lower interest rates than credit cards — some as low as 6 percent. However, you typically will only qualify for rates this low if you have excellent credit. In comparison, as of January 2018 the average credit card interest rate was higher than 16 percent.

A personal loan may be an enticing option if you have a lot of credit card debt, as it could allow you to pay off your high-interest credit card debt and then pay off the personal loan at a lower rate. Typically, as most lenders have a $1,000–$5,000 loan minimum, personal loans are only a viable option if you have several thousand dollars of debt.

Using a personal loan to pay off credit card debt could help you save money on interest and potentially get out of debt faster.

Is a personal loan the right option?

Taking out a personal loan to pay off your credit card may make financial sense in the short term. But a personal loan may not be a viable long-term solution unless you address the root cause of your debt.

Is your debt the result of an overspending issue or a lack-of-income issue? Whatever it may be, consider identifying and treating the cause of debt by making lifestyle and financial changes before taking out another loan.

Beverly Harzog, credit card expert and author of “The Debt Escape Plan,” offers another alternative to personal loans.

“If you have excellent credit scores, you may be better off getting a balance transfer credit card that offers a 0 percent introductory APR. 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.

Find a balance transfer credit card

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If your credit scores aren’t high enough to qualify for a 0 percent introductory 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.

What are some potential issues with personal loans?

Shannon McLay, founder of financial services company The Financial Gym says, “It’s important to note that your interest rate with a personal loan may be lower than your credit card rates. However, 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.”

So you may save money on interest, but your overall payments could be higher and present a cash flow issue. And according to McLay, 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.

Harzog also advises that borrowers “read the fine print carefully and look for fees, such as loan-origination fees and prepayment penalties.”

Loan-origination fees are charged by the lender for processing your new loan application and are typically a small percentage (6 percent or less, generally) of the total loan. They 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.


Bottom line

Taking out a personal loan to pay off credit card debt is an unconventional alternative that could save you money over time. If you’ve treated the root cause of your debt and have stable cash flow, a personal loan might be an attractive option.

However, it’s important to read the terms and conditions and ask a lot of questions. And if you decide to take out a personal loan, try to work with 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 to ensure it makes financial sense for you in the long run.