But despite the lower average balance, credit cards might pose a greater threat to your financial well-being than student loans. Between sky-high interest rates and low minimum payments, there’s no end in sight for some borrowers.
So, if you’re neck-deep in credit card debt, find out how using a personal loan to pay off credit cards could be a good option for you.
How to use a personal loan to pay off credit cards
A personal loan to pay off credit cards is often called a credit card consolidation loan.
The idea is to get a credit card consolidation loan with a lower interest rate than what you’re paying on your credit card as well as a set repayment period. That way, you get a defined repayment plan.
For example, let’s say you have a $4,000 balance on your credit card with an 18.00% APR. If you qualified for a three-year personal loan with 12.00% APR, your monthly payment would be $133, and you’d pay $783 in total interest over the life of the loan.
If, however, you kept the debt on the credit card and paid $133 per month, it’d take you close to three and a half years to pay off the debt, and you’d pay $1,359 in interest during that time.
In other words, you’d save $576 by opting for a credit card consolidation loan.
Here’s a quick recap:
|Product||Repayment Term||Total Interest Paid|
|Personal loan (12.00% APR)||36 months||$783|
|Credit card (18.00% APR)||41 months||$1,359|
You also can use personal loans to pay off multiple credit cards by consolidating them all into one payment with one interest rate.
Advantages of using a personal loan to pay off credit cards
Personal loans will carry the biggest benefit if you’re currently paying high interest rates on multiple credit card accounts. Here’s why.
1. Potentially lower interest rate
Even a small change in your interest rate can make a big difference, especially if you have a lot of credit card debt. Keep in mind that there’s no guarantee your interest rate will be lower on a personal loan. It will depend on your creditworthiness.
2. A single payment
Moving debt from multiple credit cards to one credit card consolidation loan can simplify your debt payoff.
For example, you won’t have to worry about various payment dates and amounts. Plus, making one payment instead of several could help keep you on track and organized with your bill payments.
3. Quicker debt payoff
With just one debt payment every month and one fixed interest rate, you might be able to pay off your loans on a shorter timeline.
That’s mostly because credit cards don’t have a set repayment period. In fact, if your balance is high enough, you could never get out of debt by paying just the minimum payment.
Disadvantages of using a personal loan to pay off credit cards
Although there could be benefits to taking out a personal loan to pay off credit cards, it also carries inherent risks. Research your options and weigh these cons against the pros before taking out a credit card consolidation loan.
1. Potentially higher interest rates
That’s a massive range, and you typically need excellent credit to get the best rates. So, if your credit card interest rate stands at 18.00% APR and you qualify for a personal loan at a 25.00% APR, you’d be better off keeping the debt where it is.
2. You might not be able to afford it
If you have a large credit card balance, moving it to a credit card consolidation loan you have to pay off in just a few years might break your budget.
For example, if you moved $15,000 in debt to a three-year personal loan with a 12.00% APR, your monthly payment would be $498. If your budget is tight and you have no plans to make extra money to pay off your debt faster, it might be hard to manage.
3. You might have to pay a fee
Some personal loan companies charge an origination fee. This fee typically ranges from 1 percent to 6 percent of the loan amount. If you borrowed $15,000, for example, you’d pay between $150 and $900 upfront.
So, depending on the situation, using a personal loan to pay off credit cards could be more expensive, even if the loan has a lower interest rate.
If you’re planning on taking out a personal loan, shopping around to get the best deal can be overwhelming and frustrating. That’s where LendingTree’s* personal loan shopping tool comes in. Just enter your information once, and you can get offers from multiple lenders, all without damaging your credit score. Because LendingTree works with dozens of lenders, you’re more likely to find a lender willing to lend to you and qualify for a competitive interest rate. *In full disclosure, LendingTree is our parent company
Is a credit card consolidation loan the best move for you?
If you have a solid credit history and high-interest credit card debt, a credit card consolidation loan could help you save money on interest and repay your debt sooner.
If you can qualify for a low interest rate, a low or nonexistent origination fee, and a manageable monthly payment, the math could be in your favor. Use a credit card consolidation calculator to get the real numbers.
And if a credit card consolidation loan doesn’t seem like the way to go, another option you can consider is a balance transfer with a zero-interest credit card. These cards offer 0% APR promotions for a period, allowing you to pay down your debt with no interest at all.
Most cards, however, charge a balance transfer fee, which is usually between 3 percent and 5 percent. Also, if you don’t pay off the balance before the promotional period ends, you’re back to where you started, at least with regard to having a high interest rate.
At the end of the day, make sure you’re taking the time to consider all your credit card debt consolidation options. Even if you don’t qualify for the best deals out there, you’ll have the knowledge you need to create your next action plan for paying off your credit cards effectively.
Paula Pant contributed to this article.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|