Can You Use a Personal Loan To Pay Off Credit Card Debt?

You can use a personal loan to pay off credit card debt in a process known as debt consolidation. Paying off one form of debt with another may seem unusual, but it can make sense if the loan offers a lower annual percentage rate (APR) or a more manageable repayment structure.

This guide explains how using a personal loan to pay off credit card debt works, along with the potential benefits and drawbacks to consider.

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Quick Take

• You can use a personal loan to pay off and consolidate your credit card debt.

• Doing so is worth it if the personal loan carries a lower APR than your credit card(s) and you can avoid racking up new balances.

• It’s not worth it if the personal loan’s APR is higher or if you’re likely to rack up new credit card debt.

How Using a Personal Loan To Pay Off Credit Card Debt Works

Using a personal loan to fully repay credit card balances is relatively straightforward.

1. Check your credit: Assess whether your credit is likely to qualify for a personal loan with favorable fees and interest rates. You can get your credit report from each of the three major credit bureaus at AnnualCreditReport.com.

2. Calculate total payoff amount: So you know exactly what you need to borrow to consolidate and pay off your current credit card balances.

3. Compare lenders: Many banks, credit unions or online fintech companies let you pre-qualify, a process that uses a soft credit pull and won’t harm your credit score, to find a personal loan with the most affordable interest rates, fees and repayment terms.

4. Choose a loan offer and apply: Select the best combination of APR, fees, total interest and monthly payments. Formally apply by filling out the loan application and providing personal and financial information to prove your identity, address and income. Once approved, you can review the loan’s terms and conditions before signing the final loan agreement.

5. Receive funds: In most cases, lenders disburse your loan proceeds via an electronic funds transfer between one and five business days.

6. Pay off credit cards: Once your loan disburses, you can use those funds to pay off your credit card balances. This move consolidates your debt into a single loan balance.

7. Follow your repayment plan: Most personal loans have a fixed repayment period, typically two to seven years. You can typically use autopay to ensure you don’t miss monthly payments.

Example: Does a Personal Loan Save You Money?

A personal loan may help you save on interest if your credit card has a high APR and you qualify for a lower rate.

For example, say you have a $10,000 credit card balance with a 21% APR and are making minimum payments equal to 2% of the balance, plus interest and fees. You qualify for a 5-year, $10,000 personal loan with a 12% APR.

Assuming you don't add new debt and make minimum payments on time, the estimated costs could look like this:

In this example, the personal loan could save you around $4,553 in interest.

However, results will vary based on rates, fees and repayment habits. It's also important to consider whether you can comfortably manage the fixed monthly payment. Using an online loan calculator can help you run through different offers and scenarios.

Pros and Cons of Using a Personal Loan for Credit Card Debt

Before using a personal loan for credit card debt, it’s important to weigh the advantages and potential drawbacks:

Pros

• Comes with lower APRs than credit cards, so if you qualify for top rates, you may save on interest.

• Fixed interest rates and predictable, potentially easier-to-budget-for monthly payments.

• Clear, definitive “get-out-of-debt” date, whereas credit cards let you revolve balances and rack up interest indefinitely.

• Consolidating multiple balances into a single loan makes it easier to manage and make all monthly payments.

• Paying off credit cards could improve your credit utilization rate and boost your credit score.

• Adding a personal loan, alongside revolving accounts, like a credit card, can positively impact your credit score over time.

Cons

• If you have so-so or bad credit, you may not qualify for a lower APR than your credit cards, and you may wind up paying more in interest.

• Applying for a personal loan will generate a hard inquiry on your credit report and ding your credit score.

• Locks you into set monthly payments, sometimes for 7 years or longer, providing less flexibility and potentially costing you more in total interest.

• Personal loans might come with origination fees, prepayment penalties and other charges that affect potential savings.

• Unless you close your credit cards, you can run up new balances, putting you at risk of owing both debts and damaging your credit score.

• Closing credit cards to avoid running up new debts could hurt your credit utilization rate and lower your credit score.

What Interest Rate Do You Need to Make This Worth It?

That depends on the interest rates that your credit cards carry, but, as a general rule of thumb, using a personal loan to pay off credit card debt is worth it if the personal loan’s APR is lower than the weighted average across your credit card balances.

• To determine your weighted average, multiply each credit card balance by its APR, add the results and divide that number by your total balance.

• If that average is higher than the APR you’ve been offered on a personal loan, you could pay less interest by using the personal loan to pay off those credit card balances.

Remember, you’ll also need to consider a loan’s origination fee, prepayment penalty or other charges, along with its term, to determine if you’re truly saving over the life of the loan.

Personal Loan vs. Other Debt Payoff Options

A personal loan is just one way to pay off debt. Here’s how it compares to other common options:

When a Personal Loan Makes Sense and When It Doesn’t

A personal loan can be a smart choice in some situations, but not in others. Here’s how to decide:

When It Makes Sense

• Your credit is good enough to qualify for a lower APR.

• You want predictable monthly payments.

• You’d benefit from a set payoff date.

• You trust you won’t rack up new credit card debt.

• You have many credit cards and want to simplify repayments.

When To Avoid It

• Your credit is bad and will only qualify for higher APRs.

• High personal loan fees will eat into your savings.

• You’re at risk of running up new credit card balances.

• Your income can’t consistently support the loan’s monthly payment.

• You’re considering a DMP or bankruptcy.

Key Takeaways

• You can use a personal loan to consolidate and pay off credit card debt.

• Whether this move is worthwhile largely hinges on your ability to qualify for personal loan terms that are low enough to save you on credit card interest.

• The risks of using a personal loan to pay off credit cards include running up new credit card balances, losing repayment flexibility and harming your credit score.

• Other debt consolidation alternatives include balance transfer credit cards, DMPs and DIY payoff strategies, like the debt avalanche or debt snowball methods.

• Compare offers, calculate savings and consider your spending habits and goals to determine which option is best for you.

Terms To Know

• APR: The total annual cost of financing, including select fees and interest, expressed as a percentage

• Balance transfer fee: An upfront fee, typically 3% or 5%, that issuers often charge to move a balance from one credit card to another

• Credit utilization ratio: How much revolving debt you’re carrying, relative to your credit card limits — and a major component of credit scores

• Debt consolidation: The process of combining multiple outstanding debts into one loan, ideally at a lower APR

• DMP: A program, typically set up for a small fee by a nonprofit credit counseling agency, that helps you repay unsecured debts over a 3 to 5 year period, often at negotiated interest rates

• Origination fee: An upfront fee, typically around 1% to 10%, that lenders may charge to process, underwrite and fund personal loan applications

FAQs

What APR makes consolidation worth it?

It depends on the APRs on your credit card debt. Ultimately, the personal loan’s APR, origination fee, prepayment penalty and other charges need to be lower than what you’re paying, on average, across your credit card balances.

Will a personal loan lower my monthly payment?

A personal loan could lower your monthly payment. However, it depends on the loan’s amount, fees, APR and term.

Should I close credit cards after paying them off?

You can, and doing so could be the right move if you’re at risk of racking up new balances. However, closing credit cards can hurt your credit utilization ratio and damage your credit score, so it’s best to weigh the move carefully.

How fast can I get funds?

Many online lenders offer same-day funding for personal loans, with most disbursements occurring within 1 to 5 business days.

Is this a good option with bad credit?

It can be harder to save on interest and fees if you have bad credit and want to pay off credit card debt with a personal loan, as you’re unlikely to qualify for the most favorable APRs, fees and terms on new financing.

You might benefit from a debt consolidation loan if you’re looking to simplify your finances, switch to a predictable monthly payment or secure a hard pay-off date for your debts.

Josephine Nesbit contributed to the reporting for this article.

Sources

• Federal Reserve Bank of St. Louis. "Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan."

• Federal Reserve Bank of St. Louis. "Commercial Bank Interest Rate on Credit Card Plans, All Accounts."

Photo Credit: Kiwis/iStock.com