Should you use a personal loan to pay off credit card debt?

If you have a high-interest card balance, you know that it can be incredibly taxing. Some people choose to alleviate that stress by using a personal loan to pay off credit card debt. While using a personal loan to consolidate your debt might not work for everyone, it can be a great way to lower your interest rate and pay off your debt faster if you qualify.

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We will explore the pros and cons of using this particular debt payoff method, and alternatives to consider if using a loan to consolidate your debt is not right for you. 

How a personal loan can help pay off credit debt

Personal loans provide a lump sum of cash that you can apply toward your credit card debt. Unlike a credit card, a personal loan has a set interest rate and a specific term. 

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You'll make consistent monthly payments to your personal loan lender until you pay off your debt. It's particularly helpful because you can see the end goal in sight, unlike a credit card balance — which you can have for years if you only pay the minimum.

The pros of using a loan to pay off credit card debt

There are several pros to paying off credit card debt with a personal loan:

Lower interest rates

As of January 2024, the average personal loan rate is just under 12%. Conversely, the average credit card interest rate as of January 2024 is just over 24%. So, paying off your credit cards with a personal loan could save you hundreds, if not thousands, of dollars in interest fees over time. The lower monthly payment can also help you become debt-free much faster.

One monthly payment

The other benefit of securing a personal loan to pay off credit card debt is that you can focus on one monthly payment. A single payment is especially helpful if you’re juggling multiple credit card payments each month. 

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Of course, you’ll need to apply for a personal loan large enough to pay off your credit card debt in full if you want to have only one payment each month. Additionally, having one payment to focus on can relieve a lot of the stress that comes with having several credit cards.

Potential improvement in credit score

Carrying a balance on your credit cards can negatively impact your credit score, especially if you've maxed out or used more than 30% of your available credit.

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When you move your credit card balances to a personal loan, it’s likely your credit score will increase. Even though you have the same amount of debt, you’ve moved your debt to a different type of loan called an installment loan, whereas a credit card is revolving credit. 

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Installment loans can help improve your score each time you make on-time payments. Additionally, having low credit utilization by not carrying a balance on your credit cards helps improve your score, too.

The cons of using a loan to pay off credit card debt

Although there are many benefits to paying off your credit card debt with a personal loan, there are some drawbacks too:

Easy to get back into debt

Once you use personal loan money to pay off your credit cards, you suddenly have available credit again. It can be incredibly tempting (and easy) to get back into debt if you don’t address the root cause of overspending.

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For example, if your debt was a result of an unforeseen emergency, take steps to set up a savings account to avoid going back into debt. If your debt is due to excessive shopping habits, create a budget or talk to a professional for help.

Potential for high loan fees and expensive rates

Personal loans come with fees, like origination fees, which can be as much as 10% of the loan. It’s important to do your homework to determine whether the lower interest rate minus the fees you incur will save you money.

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Ask each lender to clarify what their fees are before getting a loan from them. The best lenders are transparent about how much your loan will cost you in total. If your credit score has suffered due to your credit card debt, your personal loan may also come with a high-interest rate. 

Possible impact on credit score in the short-term

Applying for a personal loan will impact your credit score in the short term because lenders typically do a hard inquiry on your credit report, causing a dip in your score. 

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However, once you refinance your credit card debt to a personal loan, you should see your score improve. 

When is it a good idea to pay off credit card debt with a loan?

If you’re unsure about paying off your credit card debt with a loan, here are a few telltale signs that it may be worth it: 

• You can secure a personal loan with a lower interest rate than your credit cards, and it saves you money. 
• The amount you qualify for can pay off your debt in full.
• You can make your personal loan payments on time every month, effectively avoiding high penalty fees.  

Tips for successfully paying off credit card debt with a loan

Compare loan options and lenders

Before settling on a lender, review their fees and interest rates. Don’t go with the first lender that approves you. Instead, choose one that offers the best terms.

Borrow only what you need to cover your debt

Though it might be tempting to borrow more money than you need, only take out enough to pay for your credit card debt. Doing so will prevent you from going further into debt.

Close or freeze your credit cards to avoid new debt

If you find it too tempting to use your credit cards after paying them off, consider freezing your cards to stop yourself from using them. Doing so can help you rein in your spending.

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Consider closing your accounts if you have several cards. However, do not close your oldest account. Closing your oldest account can drop your score, as the age of your credit history is a factor in your overall credit score.

Live frugally and prioritize loan repayment

Working on your spending habits and adopting more frugal lifestyle habits can help you avoid repeating the same financial mistakes. It can also help free up cash flow to pay off your debt faster. Look at your highest spending categories, whether food, rent, or something else. Consider making changes that reduce your significant expenses.

Identify the root cause of your debt

Finally, identify the cause of your debt. Did you have a health scare but lack an emergency fund? Have you moved to a new city and have expensive moving costs? Are you surrounded by friends who spend beyond their means? 

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Whether your credit card debt is due to a one-time problem or long-held bad habits, taking the time to self-reflect and identify the issue can help prevent falling into debt again. Once you understand why your finances are vulnerable, making a plan that empowers you to manage your money better is critical. 

Alternative ways to pay off your credit card debt

If you don't want to get a personal loan to pay off your credit card debt or you don’t qualify, there are still a plethora of debt relief options to consider: 

Budget and create a debt repayment plan 

Creating a budget is a straightforward way to see where your money goes each month. Once you have more awareness, you can find ways to cut back and reallocate more of your cash flow to debt repayment.

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If you can't find ways to cut back, work hard to create additional income and pay down your debt faster. You can take on a part-time job, start a side business, rent out your home, or even make extra money with unused garage space. 

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Using the debt snowball method, you can tackle your smallest debts first and find motivation in the wins. Alternatively, you can use the debt avalanche method, which prioritizes high-interest debt, to pay the least interest throughout paying off your balances. 

Negotiate with creditors

It’s possible to negotiate with your creditors. Call each of your credit card companies and ask for a lower interest rate for some time. Additionally, ask if they have a hardship program, which is a structured program that credit card companies offer to help you pay down your debt faster at a lower interest rate.

Apply for a balance transfer card 

Applying for a balance transfer credit card is another method of paying off your credit card debt. To do this, search for a credit card offering 0% APR for balance transfers for a set period (usually 6-18 months.) Doing so lets you pay off your balance faster because it doesn't accrue interest for the set term. 

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The catch is that most credit cards will charge a three to five percent fee for transferring your balance, so it's important to do the math and determine whether this option makes sense financially.

Work with a debt settlement service 

Another option is to work with a debt settlement service to pay off your debt. It's important to note that working with a debt settlement company usually harms your credit score, so it shouldn't be your first strategy. You typically have to stop paying your credit card bills for several months for them to decide to settle your debt for a lower cost. 

Tap your equity

If you are a homeowner, another way to get access to cash is to tap into your home’s equity. Here are a few ways to access your home’s wealth: 

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Home Equity Investment (HEI): A Home Equity Investment (HEI) empowers you to get cash without having monthly payments over the 30-year term. Instead, you share a portion of your home’s future appreciation when you decide to sell or refinance the home. HEIs have lower credit score requirements than other home equity options and do not require an income. 

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Home equity loan/HELOC: A home equity loan and a home equity line of credit (HELOC) allow homeowners to borrow using the equity in their home as collateral. With a home equity loan, you’ll have access to a lump sum of cash, while a HELOC will give you a revolving line of credit. 

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You can use this cash for whatever you like. However, if you aren't able to make your payments on time, you could lose your house to foreclosure. Generally, these solutions require a strong credit score and income. 

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Cash-out refinance: Another option is to do a cash-out refinance on your home. Refinancing replaces your existing mortgage with a larger one, allowing you to pocket the difference. Your new loan will come with a new rate and terms. 

Borrow money from family or friends

Borrowing money from family members is typically inadvisable because it can strain your relationship if you are unable to pay it back. If you decide to borrow money from a family member, create a contract that clearly defines when you will repay the loan.

Final thoughts

Using a personal loan to pay off your credit card debt can be worthwhile if you can qualify for a personal loan that will pay off all your debt, get a lower interest rate, and have the income to make regular monthly payments.

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There are many options for paying off credit card debt, and this is just one of them. If you can’t get a personal loan to pay off your debt, consider one of the alternatives above that fits better with your personal financial needs.