Using a personal loan to pay off credit card debt: Is it right for you?

If your credit card debt has gotten out of control, there are several options that could help. One of these is using a personal loan to pay off credit card debt — a process also known as credit card consolidation. This strategy can simplify your repayment and potentially save you money on interest.

Here’s a closer look at using a personal loan to pay off credit card debt and how to decide if it’s a good choice for your situation.

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

Using a personal loan to pay off credit card debt can be a smart way to get your finances under control. However, it’s not necessarily the right move for everyone. Like any financial decision, deciding whether a personal loan is the best way to tackle credit card debt will depend on your specific financial circumstances.

When to use a personal loan to pay off credit card debt

Using a personal loan to pay off high-interest credit card debt could be the right move if:

• You can get a lower interest rate. Personal loans generally have lower interest rates than credit cards. This means you could significantly reduce your overall interest costs by consolidating your credit card debt, and you might even be able to pay off your debt faster. Additionally, personal loans usually have fixed interest rates — meaning your payments will stay the same throughout the life of the loan. 
• You want to extend your repayment term. Personal loans for debt consolidation typically have repayment terms from one to seven years, depending on the lender. Choosing a longer term can also reduce your monthly payments, though it means you’ll pay more in interest over time. 
• You need to simplify your repayment. Paying off your credit card debt with a personal loan will leave you with just one loan and payment to manage. If you’re struggling to keep track of multiple cards with different rates and payments, consolidating them into one loan can make repayment much less stressful.

When not to use a personal loan to pay off credit card debt

There are also some cases when using a personal loan to pay off credit card debt might not be a good idea. For example, other payoff strategies could be a better choice if:

• You can’t qualify for a good interest rate. You’ll typically need good to excellent credit to not only get approved for a personal loan but also to qualify for the best interest rates. While some lenders offer debt consolidation loans for bad credit, these loans can have higher interest rates and more fees. In this case, a debt consolidation loan might not be worth it.
• You don’t want to pay additional fees. Some personal loans for debt consolidation come with fees, such as origination fees or late fees. These can add to your overall borrowing costs.
• You don’t have good credit habits in place. While using a personal loan to pay off debt can be a helpful strategy, it won’t fix the problems that led to having excessive credit card debt in the first place. If you haven’t worked to build good credit habits first and rack up more debt before paying off your personal loan, you could end up worsening your financial problem instead of solving it.

Tip: Applying for a credit card consolidation loan with a co-signer or joint applicant who has good credit could qualify you for a more favorable interest rate than you’d get on your own. However, this is a major ask — a co-signer is liable for repayment if the primary borrower doesn’t make payments, and a joint applicant is equally responsible from the start of the loan.

Additionally, not all personal loan lenders permit co-signers or joint applicants, so you’ll need to check before applying.

How to pay off credit card debt with a personal loan

If you’re ready to use a personal loan to pay off credit debt, follow these steps:

1. Check your credit. When you apply for a credit card consolidation loan, the lender will pull your credit to make an approval decision. To see where you stand beforehand, be sure to review your credit reports and check your credit score. If you find any errors in your credit reports, dispute them with the appropriate credit bureau to potentially boost your credit score.
2. Compare lenders. Before you apply, take the time to shop around and compare your options with as many personal loan lenders as possible to find the right option for you. Consider factors like interest rates, loan amounts, repayment terms and eligibility requirements as you weigh your choices. Many lenders allow you to get pre-qualified with only a soft credit check that won’t hurt your credit score. This will give you an idea of what rate and terms you could get approved for should you apply.
3. Pick a loan option and apply. After you’ve done your research, pick the lender you like best, and submit a formal application. In many cases, this can be done fully online, though some lenders might require you to visit a local branch. Be prepared to provide documentation, such as tax returns and pay stubs.
4. Get your funds. If you’re approved, the lender will have you sign a loan agreement so the funds can be disbursed. You can typically expect to get your funds within a week of approval — though some lenders offer faster funding as soon as the same or next business day. Several debt consolidation lenders also provide the option of sending the funds to your creditors directly, which can make the process even easier.

Tip: If you’re struggling to make your credit card payments but don’t qualify for a loan, reach out to your creditors to see if any assistance options are available. Sometimes, credit card companies offer reduced interest rates or alternate repayment programs to financially-strapped borrowers.

Alternatives to paying off credit card debt with a personal loan

If using a personal loan to pay off your credit card debt doesn’t seem like the right fit, here are some alternatives to consider:

Balance transfer card

Some balance transfer cards come with a 0% annual percentage rate (APR) introductory period — often six to 21 months. This means that if you’re able to pay off your balance before this period ends, you could avoid interest charges altogether.

However, if you have a remaining balance when the promotional period ends, you could be subject to the card’s regular interest rate. If that rate is higher than what you were already paying, your balance transfer might end up costing you more in the long run. 

A balance transfer fee of 3% to 5% will also generally apply to any transfers you make. Plus, a balance transfer card is still another credit card, so it could be tempting to rack up more debt if you’re already struggling not to use your original credit cards. 

Ready to move your credit card balance? How to do a balance transfer

Home equity loan

If you’re a homeowner, then tapping into your equity with a home equity loan can be a more affordable way to consolidate debt compared to using a personal loan. With a home equity loan, you’ll receive a lump sum payment, and you’ll usually have a fixed rate — similar to a personal loan. 

A home equity loan, however, typically has lower interest rates than a personal loan. This is because your house acts as collateral for the loan, which reduces the risk for the lender and results in better rates. But this also means you risk losing your home if you can’t make your payments.

HELOC

Another potential option for homeowners is a home equity line of credit (HELOC). This also allows you to borrow against your home’s equity. But instead of getting a lump sum, you’ll have access to a revolving credit line that you can draw from on an as-needed basis. You’ll also only pay interest on what you actually borrow from a HELOC rather than on the entire credit line.

Note that while HELOCs also have lower interest rates than personal loans, these rates are usually variable. This means your rate and payment can fluctuate based on market conditions. Your home is also collateral for the loan, so it could be foreclosed on if you fail to pay off what you borrow.

Debt snowball method

There are also a variety of payoff strategies that can be applied to credit card debt to help you accelerate repayment and eliminate the financial strain more quickly. One of the most popular debt payoff strategies to consider is the debt snowball method.

With this strategy, you’ll focus on repaying your credit card with the smallest balance first. To do this, you’ll put any extra funds you have toward this balance while continuing to make the minimum payments on your other cards. After the smallest balance is paid off, you’ll move on to the card with the next-smallest balance — continuing in this fashion until all of your balances are repaid. 

The debt snowball method can be a good choice if you’re motivated by small wins. However, it likely won’t save you money on interest.

Debt avalanche method 

The debt avalanche method is another popular debt payoff strategy. With this method, you’ll concentrate on paying off your credit card with the highest interest rate first. You’ll put any extra funds toward this card while making the minimum payments on your other cards. Once the balance with the highest rate is paid off, you’ll focus on the card with the next-highest rate — continuing until all of your credit card debt is eventually paid off.

This approach can help you save money on interest over time. But you also likely won’t see results as quickly as you would with the snowball method. 

Which is right for you? Debt snowball vs. debt avalanche

Debt management plan

You might also consider a debt management plan. With this option, you’ll work with a credit counselor to set up a personalized budget as well as to consolidate your debts under one payoff plan. The counselor will then work with your creditors to get them on board with the plan. Your creditors might also agree to reduce your interest rates, waive fees or provide other benefits.

Afterward, you’ll make fixed monthly payments to the credit counseling agency, which will disburse the funds to your creditors. It typically takes three to five years to successfully complete a debt management plan.

Struggling with debt? Compare the best debt management companies

Debt settlement

If you need a fast resolution to your debt, you could try to negotiate a settlement with your creditors. This involves asking your creditors to accept a lump-sum payment for less than what you owe in return for forgiveness of the rest of your debt.

While you can do this on your own, you could also opt to work with a for-profit debt settlement company to negotiate on your behalf. While this is easier, it will also come with fees — usually a percentage of the debt enrolled in the settlement program, depending on the company.

Keep in mind that debt settlement companies will often ask you to stop making your payments while they try to negotiate, which can severely damage your credit. Additionally, debt settlement isn’t always successful. 

How to decide: Debt consolidation vs. debt settlement