Personal loans to pay off bills: What to know

Managing household expenses can become challenging—particularly when the unexpected arises, or you're juggling high-interest debts. A personal loan can be a viable solution when your monthly cash flow isn't meeting your needs. But is it the right approach to paying off bills? 

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This blog explores how personal loans work, the pros and cons of using personal loans to pay off bills, and alternative options. 

Can you use personal loans to pay off bills?

Yes, personal loans can be used to pay off various bills, like utility bills, medical expenses, credit card debt, and more. There are generally no restrictions on what borrowers can do with the lump-sum payout—giving you the flexibility to consolidate or catch up where needed.

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However, they are not a cure-all. Personal loans come with interest rates and repayment terms that need to be managed carefully. Monthly loan repayment begins near-immediately, which could worsen your situation if you're not prepared to handle it. Therefore, consider the pros and cons before applying. 

The pros and cons of using personal loans to pay off bills

The advantages and drawbacks to weigh are:

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Pros

• Debt consolidation: You can simplify multiple bills into one manageable monthly payment. If you can secure a lower rate, you may also be able to pay off debt faster.
• Lower interest rates: Personal loan rates tend to be lower compared to credit cards. You'll need a good credit score for the best rates and terms.
• Predictable payments: Fixed interest rates and repayment terms make budgeting easier.
• Fast access to funds: You can often secure funding within just a few days, which can help with urgent needs. 

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Cons:

• Eligibility: Most personal loan lenders prefer borrowers with a credit score of at least 600, though many offer loans for those with bad credit. You’ll also need proof of stable income and a good debt-to-income ratio, ideally under 40%.
• Interest rate ranges: If you have poor credit, you will face high interest rates, increasing the total repayment cost.
• Fees: Taking out a personal loan isn't free—origination fees and prepayment penalties can add to the cost.
• Risk of over-borrowing: It can be tempting to take on more debt than necessary—especially if you're trying to keep a buffer. However, you'll owe interest monthly on the balance, not what you use. This can increase costs and make you financially vulnerable.

Tips for successfully using a personal loan to pay off bills

To ensure you find the best deal—and set your future self up for success: 

• Shop around: Compare lenders to find the most favorable rates and loan terms—never settle for the first offer.  
• Prequalify: Use online prequalification tools to gauge your eligibility and possible terms without impacting your credit score.
• Improve your financial health first (if possible): If you can, take time to improve your credit score, take on a side hustle, or pay off a small bill. By doing so, you can improve your chances of qualifying and securing a decent rate.
• Budget: See how a repayment plan fits into your current monthly budget. If it worsens your situation or you have a high risk of defaulting, explore alternative solutions.
• Reduce expenses: Consider cutting down on discretionary spending or living more frugally to free up cash for repayment.

Alternatives

If a personal loan will only serve as a temporary band-aid or doesn’t fit your situation, consider: 

Credit cards 

A credit card with a 0% introductory APR can allow you to pay off bills interest-free for a set time. You can also explore balance transfer credit cards to consolidate credit card debt and free up more of your budget for bills. 

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Both offer introductory periods, which can save you money on interest so long as you pay them off quickly. However, if you’re uncertain about paying off the balance before the promo ends, it’s likely best not to saddle yourself with this debt. 

Home equity financing

If you need more significant help—more money or a longer repayment period—and have sufficient equity, consider tapping it for your needs. 

• Home equity line of credit (HELOC): Gives you a flexible, revolving credit line you can access as needed. You can enjoy interest-only payments during the draw period. Once this ends, you'll repay what you owe via monthly payments at a variable rate. You'll need at least 20% equity, a credit score above 620, and sufficient income to qualify.
• Home equity loan: Provides a lump sum loan with fixed payments. The repayment term is generally 5 to 30 years. To qualify, you must own 20% equity, a credit score above 620, and a stable income.
• Home equity investment (HEI): A lump sum payout in exchange for a slice of your home's future appreciation. There are no monthly payments over a 30-year term. Instead, you pay the HEI back when you sell the home, refinance, or use another source of funds. You can qualify with a credit score above 500 and sufficient equity—there are no income requirements. 

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It’s important to note that since your home secures the loan, should you default, you risk foreclosure. 

401(k) financing

If you have a 401(k) account, you may have another asset at your disposal. Experts don't recommend treating your retirement savings like a piggy bank; however, if your situation is dire, it may be worth exploring.

• 401(k) hardship withdrawal: You can withdraw funds to cover immediate and heavy financial needs. You'll likely incur penalty fees but are not required to repay the withdrawal.
• 401(k) loan: Allows you to borrow a lump sum from your retirement savings. Like a personal loan, you'll repay the loan plus interest via fixed payments over a five-year term.  

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Since you risk a retirement shortfall if you can’t catch up on your savings, it’s best to consult a professional before leveraging your nest egg. 

Final thoughts

Personal loans can be a useful tool for consolidating debt or simplifying your finances. However, to avoid issues in the long term, they require careful planning and consideration of the associated costs. 

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By exploring all available options, shopping around, and making informed decisions, you can take control of your finances and move toward a more stable future.

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