When you use several credit cards and accumulate debt, you can end up being in an inevitable cycle. To get out of it, you may need a personal loan to pay off credit card debt. Of course, there are advantages and drawbacks to this decision.
In this article, we are going to tell you how to define if this is the right solution for you and how to eliminate risks.
Should I Take Out a Personal Loan to Pay off Credit Card Debt?
Many people struggle to make ends meet. Thousands of consumers live paycheck to paycheck and often rely on credit cards when they need to fund immediate costs or finance extra needs.
Both credit cards and personal loans are the types of borrowing decisions that can affect your credit. If you are responsible and return the debt on time, there is a good chance for your credit score to go up. Otherwise, you can end up losing your precious points if you accumulate too much debt.
Financial experts recommend consumers to keep the total balance on credit cards below 30%.
But not every borrower can do so, with some people taking out as much as they can. You need to consider your credit utilization ratio as it’s one of the most significant factors defining your credit history together with the credit rating. If you keep your balances as low as possible, your credit utilization ratio will also decrease.
Let’s take a closer look at the differences between credit cards and personal loans.
- Credit card is a type of revolving debt which means you can make minimum monthly payments. You have more freedom to spend more than you actually need, but there is a requirement to pay annual charges as well as late fees. Interest rates are also often much higher.
- Personal loans, on the contrary, represent a type of installment loan, so you have the same monthly payments over the repayment term. It is less flexible but this way you will be protected from taking out more than you need to fund your expenses. Some creditors demand to pay origination fees which may increase the total cost of the loan.
Pros and Cons of Personal Loans to Pay off Credit Card Debt
Before you make a decision, you need to evaluate all the risks connected with taking out a new lending solution.
“The interest rates on some personal loans can be lower than the ones you have to pay for your credit card now,” mentions Breanna Reish, a certified financial planner. “If you act wisely and find a loan with smaller rates you will be able to repay the debt faster and make lower monthly payments.”
Before you submit an application to request a personal loan for credit card debt, let’s cover the benefits and drawbacks of this decision.
- Lower rates. Is your credit good enough? If yes, you can qualify for a personal loan to pay off credit card debt and get lower fees and rates. Cards usually come with higher interest, and if you are utilizing several cards already, you probably have to pay a really high price. Some personal loan lenders can offer you an opportunity to pay less.
- Fewer debt payments. Instead of paying numerous monthly payments for each card separately, why don’t you request a single personal loan to consolidate credit card debt? This way you won’t need to pay multiple charges and think about every debt you have – you will just have a single loan to repay with a single monthly payment.
- Boosting your score. You can repay the debt much faster if you obtain a personal loan for credit card consolidation. It enables you to pay off numerous debts quicker and stress-free while improving credit rating and lowering the credit utilization ratio.
- Higher fees. On the other hand, some personal loan providers charge higher fees and even ask for an origination fee (between 1% and 8%). Sometimes, the total cost of the loan can be higher than the total debt you already have. Of course, not every loan comes with an origination fee, but those without it usually have a requirement to have a good or excellent credit.
- Overspending. Generally, the amount you owe in credit card debt lowers the amount you can currently spend. However, if you decide to use personal loans for credit card debt you will be able to use your card to maximum again. So, consumers who are less responsible for their spending can rely on their cards again and overspend.
- Credit rating damage. If you turn to finance-related service providers who perform hard credit pulls, you can end up losing several points of your rating even if you are not approved. It may not be too harmful when your score is high enough, but it may ruin it for some time in case it’s low.
What to Consider When Using Personal Loans to Pay off Credit Card Debt
Before you weigh all the pros and cons and decide if this solution will work best for you, here are a few extra tips to consider.
- You should take into account the APR of the personal loan you are going to take out. This figure shows the interest rate together with additional charges for a year. Some lenders don’t charge extra fees. In this case, the APR equals the loan interest.
- The term of the loan is important. If you find a lender that is ready to issue a personal loan with a shorter repayment period and lower rates, then it’s worth it. Otherwise, why should you spend more months trying to repay the same debt? More than that, some lenders require paying additional fees and have a system of penalties for late or missed payments. You should look through the demands of several service providers and compare the offers before you decide. If you end up having to pay origination and other fees, it can be more expensive than to repay your regular credit card debt.
- Consider the amount you are going to take out to pay off the credit card with a personal loan. If the total sum is smaller than the cost of all your cards together, you will repay more in the end. Also, don’t be tempted to request a bigger amount as it may come with higher charges and interest. Take as much as you need to repay the debt and become financially free again.
To sum up, these tips can help every consumer take responsibility for their financial situation and find the best way out of the credit card debt.