Are you carrying credit card debt with sky-high interest rates — in addition to your student loans?
Yikes. That’s scary.
You might be feeling overwhelmed by payments. And you might be wondering how you can lower your interest rate, monthly payments, or both.
One potential option — which holds both upsides and downsides — is refinancing this debt by taking out a personal loan from a financial institution such as SoFi, Citizens Bank, or Upstart.
But think carefully before you use a personal loan to pay off credit cards.
Let’s assume your credit card charges 18% APR, for example, and you qualify for a personal loan with a 12% APR. In this situation, it might (theoretically) make sense to take out a personal loan, use this money to pay off the credit card, and then start chipping away at repaying the personal loan with much lower interest.
You can also use personal loans to repay multiple credit card debts by consolidating them all into one payment with only one interest rate.
As with all things in life, however, there are pros and cons to taking out yet another loan. Statistically speaking, the odds are against you. (We’ll explain why below.)
While there could be great benefits to taking on a personal loan to pay off credit cards, you will want to weigh those benefits against any drawbacks before making your decision. There’s no “right” or “wrong” answer — you’ll want to consider all the facts, then judge for yourself.
Advantages of a Personal Loan to Pay Off Credit Cards
Personal loans will carry the biggest benefit if you’re currently paying high interest rates on scattered accounts. Here’s why:
1. Lower interest rate
If you can lower your interest rate by at least 2%, a personal loan could save you quite a bit of money in interest charges.
2. A single payment
If you hold debts on multiple credit cards, and you consolidate this debt through a personal loan, you’ll simplify your debt payoff.
You won’t have to worry about various payment dates and amounts. You won’t need to worry about late fees or overdraft fees, which could help you save considerable money.
Making one payment, rather than several, could help keep you on-track and organized with your bill payments.
3. Quicker debt pay-off
If you only have one debt payment every month, with one fixed interest rate, you may be able to pay off your loans on a shorter timeline.
Holding only one debt can provide psychological motivation to crush that debt faster. You won’t need to prioritize payments based on balance due or varying interest rates. You can throw every dime at your one loan to get it paid off as quickly as possible.
Why You Might Not Want to Refinance Credit Card Debt With a Personal Loan
Debt consolidation loans have attractive qualities, but they also carry inherent risks. Research your options and weigh these cons against the pros before making any decisions.
1. Higher interest rates
Not all personal loans offer low interest rates. Some companies, like Avant, for example, offer attractive personal loans with fast approval, and no prepayment fees on unsecured loans for credit card debt consolidation. Avant’s rates range from 9.95% through 35.99%. That’s a massive range.
Is this an attractive deal? That depends on the rate for which you qualify, relative to your current credit card APR. If your credit card interest rate stands at 18%, and you qualify for Avant’s loans at a 25% rate, then you’ll be better off with your original debt.
2. You might not change your spending habits
Here’s a scary statistic: “Seventy percent of Americans who take out a home equity loan or other type of loan to pay off credit cards end up with the same (if not higher) debt load within two years,” says Chris Viale, president of Cambridge Corp., in an interview with Bankrate.com.
The single best way to reduce your interest rates (over your lifetime) is to change your habits so you can avoid digging yourself into credit card debt in the future. This requires spending less, watching your budget carefully, and earning extra money on the side.
Unless you radically change your spending practices, you may want to stay clear of a personal loan. A personal loan, at best, might act as a Band-Aid. At worst, it may add more fuel to the fire by allowing you to start racking up credit card balances again.
Re-read those last three paragraph carefully. This concept is so critical that I’m going to repeat it once again for emphasis: statistically speaking, you’re more likely to add to your debt than subtract from it. The math might make sense, but financial management hinges more upon behavior than mathematics.
If you’ve genuinely changed your spending habits, you might be a good candidate for a personal loan. But if you haven’t tended to this aspect of your financial life yet, focus first on your habits, not your interest rates.
3. Slower debt pay-off
When you lower your monthly debt payments, you may be tempted to see the sudden influx in available cash flow as extra spending money. Don’t fall victim to this mentality.
Ideally, you should make the same monthly payments on your personal loan as you did when you had higher debt payments every month.
Here’s an example: Let’s assume you used to carry debts on two high-interest credit cards, for a total monthly payment of $658. You take out a personal loan to repay this credit card debt. The monthly payment on this personal loan is only $458. You have an extra $200 per month in discretionary money. What should you do?
The correct answer is: (1) build a small emergency fund and (2) continue making your original $658 per month payments (or higher) so that you can get rid of your debt as quickly as possible.
The problem, however, is that you may or may not choose this route.
In theory, lowering your interest rate (and thus, your monthly payments) gives you the ability to crush your debt faster. But will you use this newfound ability? Or will you simply prolong your debt? That’s a behavioral question that only you can answer.
Personal Loans to Pay Off Credit Cards: Yay or Nay?
If you have the self-discipline to use your personal loan effectively and regulate your spending, then yes, refinancing credit card debt can be a valid way to save money on interest and repay your debt sooner.
If you struggle with changing your behavior, or if the lowest interest rate for which you qualify is higher than your current credit card debts, then no, refinancing is probably not the best solution.
Look at your options, assess your interest rates, find out what kind of loan you qualify for, and make your decision based off your financial situation.
Interested in a personal loan?
Here are the top personal loan lenders of 2017!| Lender | Rates (APR) | Loan Amount | |
|---|---|---|---|
| 1 Includes AutoPay discount. Important Disclosures for SoFi. 2 Important Disclosures for Citizens Bank. SoFi Disclosures1Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org) Citizens Bank Disclosures1Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of July 1, 2017, the one-month LIBOR rate is 1.22%. Variable interest rates range from 6.01% - 15.96% (6.01% - 15.96% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% - 16.24% (5.99% - 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. |
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 | 5.67% - 29.99% | $1,000 - $50,000 | Visit Upstart |
 | 5.17% - 14.24%1 | $5,000 - $100,000 | Visit SoFi |
 | 8.00% - 25.00% | $5,000 - $35,000 | Visit Payoff |
 | 5.99% - 16.24%2 | $5,000 - $50,000 | Visit Citizens |
 | 5.99% - 35.89% | $5,000 - $50,000 | Visit LendingClub |
 | 5.25% - 12.00% | $2,000 - $50,000 | Visit Earnest |
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