It can be easy to let credit card debt sneak up on you, especially if you have multiple cards. In fact, about 60% of Americans struggle with long-term credit card debt. Once you’re in debt, soaring interest rates can make it nearly impossible to get out of it. Fortunately, there are other options that could help you consolidate your debt, simplify your monthly payments, and even get a lower interest rate on the amount you owe.
One of the easiest options is to get a personal loan to pay off credit card debt. Taking out a personal loan moves your debt from the credit card company to a loan servicer of your choice, which may offer better repayment terms and more flexibility than your current creditors. That could help you get out of debt faster and get back to pursuing your other financial goals.
What is a personal loan?
A personal loan is a loan from a financial institution that can be used for a wide variety of purposes. First, the lender issues the borrower a one-time, lump-sum cash disbursement. Then the borrower repays the loan in a series of monthly payments over a specific period of time. That period, also known as the loan term, is usually two to ten years.
You can use personal loans for almost any reason, including home renovations, medical expenses, or moving expenses. Another option is to use your lump sum of cash as a debt consolidation loan, as in, to pay off other debts from multiple sources. However, personal loan proceeds may not be used for secondary educational expenses, including refinancing federal or private student loans.
The issue with credit cards is that they usually carry high interest rates. That can make your debt snowball faster than you can keep up with it. To take control of your debt, you can take out a personal loan, use that loan to pay off all your existing credit card debts, and then pay off the personal loan over time. This often puts you in a better financial situation since personal loans tend to have lower interest rates than credit cards do. Personal loans often have simpler monthly payment requirements and longer terms, as well.
Pros and cons of using a personal loan to pay off credit card debt
Like any type of loan or debt, there are benefits and drawbacks associated with personal loans. Here are some of the pros and cons of using a personal loan to pay off a credit card.
1. Lump sum is ideal for debt consolidation
One of the biggest advantages of a personal loan is that the funds are available quickly. You can use a personal loan to pay off almost any kind of existing debt. That makes personal loans ideal for debt consolidation. You can use the lump to pay off your credit card debt, then make payments to your personal loan servicer instead. That takes your debt out of your creditors’ hands and moves it to a new lender of your choice.
2. Lower interest rates on average
Personal loans generally carry low interest rates relative to most credit cards. While credit cards may offer generous introductory terms, rates can become very high once those introductory periods expire.
As of July 2022, the average personal loan rate was 10.28%, while the average credit card rate was 16.80%. With a personal loan, you can effectively transform your credit card debt into a different type of debt with a much lower interest rate. That can help you save money and put you on the road to becoming debt-free faster.
3. Simpler payments
Using a personal loan to pay off credit card debt is one way to simplify your monthly payments. If you have three credit cards with three different lenders, it can be tough to keep track of all those due dates, minimums, and interest rates. Consolidating all your credit card debt via personal loan will leave you with just one fixed rate, one fixed monthly payment, and one loan servicer to worry about.
4. Lower monthly payments
Unlike other short-term loans, personal loans tend to have lower interest rates and longer terms, which ensure more manageable monthly payments. Terms for personal loans range from two to ten years, depending on the lender.
5. Better alternative to a balance-transfer card
Some people use balance-transfer cards to restructure their debt. A balance transfer is the process of taking out a new credit card and moving your existing credit-card balances to that new card. It’s effectively a type of loan consolidation, but it’s often more expensive in the long run than a personal loan. That’s because credit card issuers typically charge a fee based on the balance carried over. Plus, once the new card’s introductory period expires, you may be left with a higher interest rate than you had in the first place.
The disadvantages of a personal loan
Personal loans do have some disadvantages, and they may not always make sense for your financial situation. Here are some things to consider before you apply for a personal loan.
1. You’ll take on additional debt
Taking on more debt is only a good idea if you can be proactive about getting out of that debt. The old adage, “robbing Peter to pay Paul,” rings true with any sort of debt-consolidation tactic. If you take out a personal loan and pay off your credit card debt, then misuse credit cards again, you could find yourself in even more debt than you started with. If you can afford it, it’s often better to increase your monthly payment and aggressively pay down your debt than it is to take out a new loan.
2. It’s hard on borrowers with bad credit scores
When you apply for a personal loan, the lending institution will pull a credit report to determine your creditworthiness. They’ll then offer you an interest rate based on your financial situation and credit history. If you are already in trouble with delinquent credit card payments, or have bad credit for other reasons, you may not like your interest-rate offer. Lenders consider borrowers with poor credit a payback risk, which means they can’t afford to offer those borrowers a low interest rate.
High interest rates aren’t the only reason to avoid taking out a personal loan if you have bad credit. If you already struggle to pay off your credit cards on time, you may not have the tools you need to manage paying off a new loan. (Instead, check out the alternatives to personal loans listed below.)
3. There could be high fees
Like many other loans, personal loans have fees associated with them. As a borrower, you can expect an origination fee to be added to your initial principal amount. (Origination fees typically cover the cost of processing the loan.) You will also incur late fees if you do not make payments on time. Late fees are usually a percentage of the loan amount, which can be very large depending on how much you borrow. Some servicers will also add prepayment penalties if you pay off the loan early.
4. You may have to offer collateral
Some personal loans are secured loans. This means they require collateral upfront. Secured loans tend to have lower interest rates than unsecured loans and better terms because the borrower is leveraging something of value in exchange for the loan. Collateral may also be required of borrowers with poor credit history to offset the risk to the lender. Types of collateral can include assets such as a car or a house. However, failure to repay the loan upon the agreed terms can result in forfeit of the leveraged asset.
Alternatives to using a personal loan to pay off credit cards
If using a personal loan to pay off credit card debt sounds like it might not be right for you, consider the following alternatives:
Balance transfer card
When someone applies for a new credit card and transfers all their existing credit-card balances to that new card, it’s called a “balance transfer.” This can be beneficial if the new credit card has a lower rate than your existing credit cards do. For instance, some introductory offers carry a 0% interest rate, which effectively eliminates the interest on your credit card debt — at least while the introductory period remains in effect.
This may all sound good at first glance, but balance-transfer credit cards do have their downsides. Your new credit card issuer may charge a balance-transfer fee, for example. This is typically a percentage of the balance being transferred.
As mentioned, introductory offers can be helpful, but they don’t last forever. The interest rate on the new card could end up higher than the rate of the old card after the introductory offer expires. If this is the case, then you could find yourself worse off than you were before. It’s also important to note that many of the better introductory offers are only available to those with excellent credit.
Home equity loan or HELOC
A home equity line of credit (HELOC), is a revolving line of credit awarded to a homeowner based on the equity they have in their home. Home equity is a measure of how much of your home you own, and what the value of that ownership is. A revolving line of credit allows you to borrow money when needed, then pay interest on the money you borrow.
Since HELOCs typically have better interest rates than credit cards do, you can use a HELOC as a consolidation loan. The tricky thing is that, when you apply for a line of credit in this way, you’re putting up your home as collateral. Failure to repay the loan within the terms could mean foreclosure on the home. For this reason, HELOCs are generally considered too risky to be used to pay off credit card debt. Instead, they’re usually recommended for home improvements that will add greater value to your home.
Debt settlement
There may be some scenarios in which you cannot pay down your credit card debt and do not qualify for an option such as a personal loan. Sometimes, you can negotiate with a lender to let you pay back only a portion of the debt you owe. This process is called debt settlement. During this process, a third party negotiates the amount you’ll pay, then guarantees your creditor that you will pay that settled amount in full.
Debt settlement might sound appealing, but it can sometimes cause more harm than good. If a financial institution does agree to settle, you could end up with hefty fees from the third-party negotiator. Debt settlement can also negatively impact your credit score, which can take years to rebuild.
Debt avalanche or snowball method
If you don’t qualify for a personal loan, you can pay off your credit cards the old-fashioned way with one of these two classic debt repayment strategies: “Debt avalanche” or “debt snowball.”
With the debt avalanche method, you continue to make minimum payments on all your outstanding debts while prioritizing paying off your highest interest-rate balances first. The debt avalanche method is the best way to pay off your debt while saving the most money on interest fees.
With the debt snowball method, you continue to make the minimum payments on all your debts, but you prioritize paying off your smaller balances first. The debt snowball method will help settle your overall debt amount faster. By paying off loans when you can, you will ultimately reduce the debt you owe in total.
Where to get a personal loan to pay off credit card debt
Many different financial institutions offer personal loans. Each has benefits and drawbacks, so be sure to analyze your options before you move forward.
Banks
Obtaining a personal loan from a bank is one of the more traditional options. If you already hold a savings or checking account with the bank, this may be a good choice for you. That’s because bank members may receive more favorable rates, higher loan amounts, and faster application options than non-members. Banks typically require good credit to issue a personal loan, especially if you are not a member already. You’ll likely need to visit the bank in person to complete this process.
Credit unions
You can also take out a personal loan through a credit union. Because credit unions are member-owned, they often carry lower loan rates and fees, which could save you money over the life of the loan. Credit unions also tend to be more generous toward individuals with fair to bad credit. To apply for a loan, you’ll need to become a member, which is often easy and inexpensive to do.
Online lenders
One of the fastest ways to obtain a personal loan is through an online lender. Online lenders have the ability to approve and disburse your loan within a day or two. You can complete the entire loan application process online, and the funds go directly to your bank account.
The downside to online lending is that borrowers rarely have an existing relationship with the institution. That means those with poor credit could receive higher rates than they might get from a bank or credit union where they’re already a member.
Find the best personal loan with Navient Marketplace
Personal loans are a fast, simple way to consolidate credit card debt. They typically come with longer terms and lower interest rates than credit cards. That makes them a great way to lower your monthly payment, simplify your debt obligations, and get out of debt faster.
If you’ve decided a personal loan is right for you, it’s time to find a lender. Start your search at Navient Marketplace, an online platform designed to take the overwhelm out of the loan application process by organizing all your options in one place. Shop the marketplace today to find the best option for your personal finance needs.