Can You Use a Personal Loan for Credit Card Debt?
Yes, taking out a personal loan to pay off credit card debts is a common way for debtors to manage the varying due dates, payment amounts, and interest accumulation associated with credit card debt. When used wisely, personal loans can potentially make it easier to manage debt payments and even save you money with a faster debt payoff timeline and lower interest rates.
However, like other debt consolidation options, there are pros and cons to taking out personal loans to pay off credit cards. Also, other credit card payoff alternatives or strategies may work better for you depending on your financial situation. We break down factors to look at when choosing to use a personal loan to pay off credit card debt, and other important information to consider.
Pros & Cons of Using a Personal Loan to Pay Off Credit Card Debt
- Potentially pay off debt sooner
- Lower interest rates
- Combine debts into single payments
- Improve credit score if you keep up with loan payments
- May require collateral
- May contribute to more debt
- Personal loan fees
Personal loans can be used as an effective way to settle credit card debt. In addition, these loans have other advantages that make them a sound choice for paying off your credit cards. Here are a few benefits to consider.
Possibly Pay Off Your Debt Sooner
When you have multiple monthly credit card payments, you may fall into a pattern of only paying the minimum amount on each account. While you may be avoiding the late fee, only paying the minimum on high-interest credit card debt can cause more interest to accumulate and push your payoff date far into the future.
With a personal loan, you could use that loan to get rid of all your credit card debt at once. Although your loan terms will vary depending on your lender, it’s possible you may be able to pay off your personal loan debt in a fraction of the time it would have taken to pay off your total credit card debts.
Lower the Cost of Your Debt
A personal loan’s annual percentage rate (APR) will typically be lower than the average credit card APR. Therefore, you can use your personal loan to pay off your credit card debt, and repay the personal loan at a lower APR, provided you have a good credit score and favorable loan terms. This can save you a decent amount of money in interest payments in the long run.
Positive Impact on Your Credit Score
Like with other types of credit, personal loan lenders do a hard credit check to qualify you for the loan, temporarily causing a dip in your credit score. But getting a personal loan can help boost your credit score in the following ways.
- Decreases credit utilization ratio: Paying off your credit card balances and combining the debt into one account can decrease your overall credit utilization ratio. This metric indicates the amount of credit you use against your available credit — below 30% is desirable. If you erase your credit card debt with a personal loan, your revolving credit utilization ratio goes to 0%.
- Adds to your credit mix: Securing a personal loan can improve your credit mix, which is 10% of your credit score. Your credit mix shows your ability to manage different types of debt and credit.
Gain More Control of Your Payments
Consolidating your credit card payments into one monthly payment streamlines the payment process to make your finances more manageable. Rather than paying off multiple debts with different payment due dates, you can focus on making a single payment with one due date every month. Also, it gives you time to reassess how you use your credit cards.
While personal loans can be a suitable option to paying off credit cards, there are some drawbacks to taking this route.
Collateral May Be Required
Most personal loans are unsecured, meaning you don’t need to offer your car, house, or other valuable assets as a guarantee to repay the loan. However, the lender may require you to commit valuable assets as collateral if your credit is sub-standard or if you can’t find a creditworthy co-signer or co-borrower. By accepting this loan condition, you could lose your home or car if you default on the loan.
Personal Loans Are Not Credit Cures
Reorganizing your debts through a debt consolidation loan doesn’t end the cycle of debt accumulation. With a clean slate on your credit card accounts, the temptation to rack up new credit card charges may remain. Also, if you continue the same spending habits, debt accumulation can continue to haunt you.
Personal Loans Come with Fees
As you shop for a personal loan lender, you should compare their fee structures. Most lenders charge an origination (processing) fee of 6% or more, along with fees for insufficient funds and late payments. Also, some lenders have an early payoff penalty fee for paying off your debt before the end of the loan. Factor in all the personal loan fees to see if it’s still cheaper overall to take out a loan or continue paying your credit card debts.
When to Use a Personal Loan for Credit Card Debt Consolidation
If You Can Get a Lower Interest Rate
If you have a strong credit history, you may be able to qualify for a personal loan with an interest rate that is lower than your credit card’s APR. With a lower interest rate, you can save substantially on interest payments through a personal loan than if you continue making minimum payments on your credit card.
If You Can Lower Your Monthly Payments
Personal loans typically come with lower interest rates and the ability to set a repayment schedule that better fits you. If you are able to obtain a lower interest rate along with a repayment timeline that lowers your monthly payments, this can make paying off your debt more affordable and easier to manage.
If You Have a Clear Debt Repayment Strategy
It’s not recommended to blindly take out a personal loan without knowing what you’ll be saving and its costs. Find out what interest rates you qualify for, the exact loan amount you’ll need, any required fees, and your repayment schedule so you’ll know exactly when you’ll be debt-free. Planning out all the details in a debt repayment strategy can help you see whether a personal loan is really worth it.
Here are a few of the best debt consolidation loans to consider:
Best for Small Loan Amounts
- Loan Amount: $1,000 – $40,000
- APR Range: 8.30% – 36.00%
- Loan Terms: 3 – 5 years
- Credit Score: 600 or higher
LendingClub offers quick funding and direct payments to creditors for debt consolidation loans.
Pros & Cons
- Low minimum loan amount
- Fast funding for personal loans (as little as 24 hours after approval)
- Joint loans allowed
- Direct payment to creditors
- Has origination fees (3% to 6% of total loan amount)
- No physical branches
- Relatively high APRs
- No co-signed loans allowed
Established in 2006 as a peer-to-peer lending platform, LendingClub offers personal loans as low as $1,000 and up to $40,000. Those seeking a personal loan will appreciate LendingClub’s offerings.
You can use LendingClub loans for almost any purpose, from home improvements to medical bills. Eligible borrowers can get personal loans with repayment terms of 3 or 5 years and borrowers can expect to receive funding as soon as 24 hours after approval. However, APRs do start at relatively higher rates than some competitors.
LendingClub can be a good fit for those looking to consolidate high-interest debt, as they offer the ability to pay your creditors directly from your loan.
You’ll likely need a credit score of at least 600 to get approved, and joint loans are available for those who need some assistance qualifying.
Best for Bad Credit
- Loan Amount: $1,000 – $50,000
- APR Range: 7.96% – 35.97%
- Loan Terms: 2 – 7 years
- Credit Score: 560 or higher
Upgrade offers flexible terms for personal loans and is accessible to borrowers with less-than-stellar credit profiles.
Pros & Cons
- Accessible to borrowers with bad credit
- Flexible loan terms
- Joint applications allowed
- Direct payment to creditors
- Secured loan options
- Has origination fees from 1.85% to 8%
- No physical branches
- Higher APRs than some competitors
Upgrade offers personal loans up to $50,000 for qualifying borrowers and is accessible to those with not-so-ideal credit scores. The low loan minimum of $1,000 also makes it an easy choice for those with small financing needs. However, borrowers in certain states will be subject to higher minimum loan amounts. If you live in Massachusetts, Upgrade’s minimum loan amount is $6,400.
While other lenders may offer longer repayment terms of up to 144 months, those are typically reserved for certain loan purposes. Upgrade has repayment terms of 24 to 84 months for eligible borrowers, no matter what expense you’ll be covering. This flexibility can be useful, especially if you’d prefer a longer timeframe to pay off your loan.
With this lender, you can expect to pay an origination fee between 1.85% and 8%. Borrowers can view their rate before applying without impacting their credit score.
Overall, Upgrade is worth considering if you’re looking for a lender that offers multiple banking products and loans with competitive rates and flexible terms.
Best for Fair to Good Credit
- Loan Amount: $5,000 – $40,000
- APR Range: 5.99% – 24.99%
- Loan Terms: 2 – 5 years
- Credit Score: 640 or higher
Happy Money offers competitive rates and direct payment to creditors with a borrowing maximum of up to $40,000.
Pros & Cons
- Direct payment to creditors
- No prepayment or late fees
- Borrower requirements clearly stated online
- Origination fee
- No co-signed or joint loans
- Can only be used to pay off credit card debt
Formerly known as Payoff, Happy Money offers personal loans that were created to knock off credit card debt. You can borrow up to $40,000, which you can roll your high-interest credit card debt into and make a single payment.
Here’s the kicker: Consolidating your credit card debt with Happy Money can make financial sense if your credit card payments end up being more affordable in the long run, even after doing the math on your new APR and origination fee.
When to Avoid Personal Loans for Debt Consolidation
If the Debt Is Small and Can Be Repaid Quickly
If the debt is small and you can reasonably pay off the debt in a short period of time, it may not make sense to take out a personal loan for it. There may be other options that can be more financially beneficial, such as 0% APR balance transfer credit cards, which may offer no interest on balance transfers for up to 21 months.
If You Cannot Control Your Credit Card Spending
If your credit card spending habits are causing you to be in constant debt, then taking out more debt through personal loans may not be a good idea. You may be caught in a cycle of debt if you aren’t able to take control of your spending. Consult a financial expert or seek help to build healthy spending habits first before making the important decision to take out a debt consolidation loan.
If You Have More Debt Than You Can Pay Off with a Personal Loan
If you have an excessive amount of credit card debt, it’s unlikely that a personal loan can solve the problem. The maximum personal loan amount offered is $100,000, and it can be difficult to even qualify for the maximum amount with most lenders.
Take a look at the amount of debt you have, and whether it may even be possible to repay it through a personal loan during your lifetime. Otherwise, it may be time to seek professional help to explore other debt-relief options.
How to Pay Off Credit Card Debt with a Personal Loan
If you decide to pay off your credit cards with a personal loan, here is a general overview of how to get started.
Step 1. Get Prequalified
The first step is to prequalify with several lenders to see what you qualify for, and allow you to compare rates. Start by gathering quotes and establishing your eligibility with potential lenders. You’ll receive estimates on your qualifying rates, loan amounts, and more.
During this process, lenders usually initiate a soft credit check, which doesn’t affect your credit score. The hard credit check will occur when you formally apply for the loan.
Step 2. Apply with a Lender
Compare your available options and choose a lender that can offer terms that are beneficial for you. Your best choice for a lender depends on what factors mean the most to you. For example, although a lower interest rate can lower your monthly payments, the length of the repayment period can produce the same effect. Don’t forget to verify that your lender is reputable.
After choosing a lender, you will submit an official application for the loan, and a hard credit check will be done.
Step 3. Information Verification
When you apply for the loan, the lender will verify your personal information, including your credit history, income, debt-to-income ratio, etc. This is to verify your identity and proof of income.
Step 4. Getting Your Funding
Upon approval of your loan, the lender typically wires the entire loan amount — minus the origination fee — to your checking account. These funds can then be used to pay off your credit cards.
Once you have used the personal loan to pay off your credit cards, you should devise a solid plan to repay your personal loan. This plan may include setting up a budget and setting aside the necessary funds to repay the loan every month.
Other Ways to Manage Credit Card Debt
If you’re not interested in or perhaps do not qualify for a personal loan, there are alternatives that are worth exploring:
Using a Credit Card with a 0% APR Balance Transfer Offer
Balance transfer credit cards allow you to pay off as much debt as possible within a 12 to 21-month period, usually with 0% interest. After the special offer period elapses, the interest charges will resume at the regular APR.
This option can be effective if you pay off the bulk of your credit card debt within the special offer timeframe. However, some lenders may end the 0% interest period if you are late with a few payments.
Home Equity Loan or Home Equity Line of Credit (HELOC)
If you want a lower interest rate than what personal loans offer, a home equity loan or a home equity line of credit (HELOC) could be another option to pay off your credit cards. This type of loan works like a personal loan, except you pledge the equity in your home as collateral.
Home equity loans are available in two variations: a standard home equity loan or a home equity line of credit (HELOC). The traditional home equity loan has a fixed interest rate, while the HELOC has a variable interest rate, meaning it fluctuates according to the Federal Funds Rate.
A home equity loan can be a low-cost and quick way to access large sums. But you can lose your home if you default on the loan.
Using the Debt Avalanche Method
The debt avalanche method is an effective way to build momentum and pay off your credit card debts. To start, pay as much as possible on the card with the highest interest rate while paying the minimum on the rest.
After you’ve cleared the balance of that card, do the same to the card with the next-highest balance. Repeat this process until you pay off all your credit card balances.
Negotiate a Lower Interest with Your Card Issuer
It may pay to ask your lenders for an interest rate reduction because some credit card companies feature hardship or forbearance programs for customers experiencing unemployment and other financial challenges.
However, credit card lenders are more likely to accommodate customers with excellent payment histories, especially when it comes to lower interest rates. You can find more valuable tips on paying off credit card debt faster here.
The Bottom Line
Now you know the pros and cons of using personal loans to pay off credit cards and their alternatives. A personal loan provides a lump sum to pay off your credit card debt, usually without collateral. As a result, it can make your payback effort more manageable by bundling your credit card debt into one payment.
However, a personal loan is still a significant debt requiring a sound repayment plan. For this reason, you should take the time to reflect and strategize before you decide to take out a personal loan.
On average, personal loan interest rates are lower than credit card interest rates. However, the interest rate you get depends on your creditworthiness. Your odds of getting a loan with a low-interest rate significantly increase if you have a good credit score.
Using a personal loan to pay off your credit card debt can help increase your credit scores in two significant ways.
If you have a high credit card balance and you pay off your entire debts, your credit utilization drops. A low credit utilization ratio has a positive impact on your credit.
Using a personal loan to pay off your credit card debt also improves your credit mix. A better credit mix ratio is an indication of being responsible with credit, which helps your credit score.
Depending on the lender, you can have one to three personal loans with the same lender. In addition, you can have as many personal loans as you need across multiple lenders. Your only limit is your ability to afford the payment. So, using numerous personal loans to pay off your credit card debt is possible but only makes sense if you have the ability to repay the loans.
Since credit cards usually have higher interest rates than personal loans, it can make sense to pay off high-interest debt first. Also, if you use a personal loan to pay off your credit cards, you may be able to lower the cost of your total interest payments.