When to Use a Personal Loan to Pay Off Credit Card Debt

In a perfect world, no one would need to take out a loan to consolidate and pay off debt. In the real world, however, sometimes borrowing money is the only way out.

This is mainly due to high interest rates on credit cards. With the average APR for credit cards at 16.35% in March 2022, consumers are being forced to pay large sums in interest. Virtually none of their minimum payment is used to pay off their credit card balance – and that’s if they’re able to stop using credit cards for purchases.

Ultimately, these challenges are why many people consolidate their credit card debt with a personal loan at a lower interest rate.

When a personal loan makes sense for debt consolidation

Although choosing to consolidate debt with a personal loan means that you are exchanging one type of debt for another, this strategy has considerable advantages, at least for people who can qualify for a personal loan with affordable interest rates. and fair terms.

You can benefit from a lower interest rate

Qualifying for a loan with the best interest rates and terms generally requires a FICO score of 670 or higher, according to myFICO.com. However, that’s the minimum score you’ll want to have for your credit to be considered average, and it helps to have a FICO score even higher than that.

Either way, personal loans come with an APR as low as 4.98% as of March 2022. That’s considerably lower than the current average APR of 16.35% on credit cards, meaning that your interest savings can be substantial.

You can consolidate your debts into one payment

If you’re juggling multiple credit cards with their own payments and APRs, arranging a debt repayment plan can be difficult. You need to make sure that you are making and maximizing your payments each month. Using a personal loan to pay off debt helps you get rid of multiple payments and move to one payment per month – and hopefully with a much lower APR.

Consider using a debt repayment calculator to determine how long you could pay off your debt with a lower interest rate.

Consider this simple example. Imagine you have $5,000 in debt on one credit card with an APR of 17% and $7,000 in debt on a second credit card with an APR of 21%. You can only invest $100 per credit card per month, with a total of $200 per month.

At this rate, you’re not even paying off all of your interest, so you’ll never pay off the debts. If you’re able to get a personal loan for your total $12,000 in credit card debt with an APR of 10%, you’ll be able to contribute your $200 each month and start paying more than your interest each month.

You can get a lower monthly payment

If you’re struggling with the weight of your credit card debt and still spending more on payments each month than you earn, a personal loan with a lower APR and a set repayment schedule may be just what you need. need.

You may be able to get a lower monthly payment on your consolidated debt with a lower APR and a long enough repayment term. You’ll have to play around with a debt consolidation calculator to be sure.

You want to know exactly when you will be free of your debts

A big problem with credit cards is that if you keep using them for purchases, you may never pay off your debt. Personal loans, on the other hand, come with a fixed interest rate, a fixed monthly payment, and a fixed repayment schedule that dictates the exact date when you will finally pay off your debt.

If you’re tired of making credit card payments but never make much progress, you might be better off consolidating your debt with a personal loan and then switching to cash or debit cards.

When a personal loan doesn’t make sense

Taking out a personal loan to pay off credit cards can be a money-saving venture, but that’s not always the case. Signs that you might want to try another method of debt consolidation can vary from person to person, but they can include the following:

You have a small debt that you can pay off quickly

If you have a fairly manageable amount of debt that you can comfortably pay off in 12 to 21 months, you might want to consider taking out a balance transfer credit card instead of a personal loan to pay off the debt. With a 0% APR credit card, you can often guarantee zero interest on balance transfers for up to 21 months, although balance transfer fees likely apply.

Although balance transfer fees can cost up to 3-5% of your pre-transferred balances, you could easily save hundreds of dollars or more on interest if you pay off your debts during your introductory offer. . Some balance transfer credit cards also offer consumer rewards and perks, so be sure to compare offers.

You will continue to use the same spending habits

Chances are, if you have a lot of debt on your credit card, you might not have the best spending habits. Consolidating your debt won’t prevent you from taking on more debt if you just continue to maintain the same spending habits.

You may want to rethink your financial strategy before trying to consolidate your debt so that you can control your spending. Consider consulting a personal finance coach or learning about different budgeting methods. Find out what works for you and build habits that will keep you out of long-term debt before trying to tackle a symptom of your bigger spending problem.

You desperately need help with your debt

Finally, there are times when you might have so much debt that you feel powerless to pay it off without help. In these circumstances, it is possible to work with a debt relief company or non-profit consumer credit counseling services. You can also check out Debt Management Plans or Debt Settlement Plans, although the Federal Trade Commission (FTC) warns that not all third-party companies offering debt relief help are reputable.

If you have so much debt that it seems mathematically impossible to pay it off in your lifetime, you could also be a candidate for bankruptcy. It may be helpful to meet with a CCCS advisor before making a decision. To weed out bad players, the FTC says you should check any agency you’re considering with your state attorney general and local consumer protection agency.

The bottom line

Imagine never having to pay a credit card bill again, or having the money you need to take a vacation or do something fun. By focusing on paying off debt, you can free up money each month, even if your main goal is just to have extra money to save.

A personal loan can make a lot of sense for debt consolidation, but be sure to consider all the options and tools available to you.

To get out of debt, you need to stop racking up bills you can’t pay. Whichever debt reduction option you choose, stop using credit cards and switch to cash or your debit card while you’re in debt repayment mode.

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