Use A Personal Loan To Pay Off Credit Card Debt

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Key takeaways

Using a personal loan to pay credit card debt can save you money and help you get out of debt faster.
Personal loans are still a form of debt. Be sure to make payments on time and avoid using credit while repaying the loan.
Alternatives like balance transfer cards, credit counseling, and negotiating with creditors may also help manage or reduce debt effectively.

You can use a personal loan to pay off credit card debt. It may seem wild that you can borrow money to dig yourself out of debt, but that’s the world we live in.

The reason this works is the high interest rate of credit cards. The average credit card interest rate has reached 24.62% APR (annual percentage rate) as of November 2024. Plenty of card issuers charge higher rates than that. A high APR means that most of your minimum monthly payment goes toward paying down interest rather than the principal. As a result, credit card debt grows.

In addition, most people are juggling multiple credit card balances. You have to keep track of when payments are due and how much you want to put towards each card.

Taking out a personal loan can be a way out of this mess. With a personal loan, you’ll be charged less interest and only have one monthly payment. It sounds like a dream come true, but as with anything else, loans have pros and cons.

How do you use a loan for debt consolidation?
Why use a personal loan to pay off credit card debt
Why not use a personal loan to pay off credit card debt
When does a debt consolidation loan make sense?
When is debt consolidation a bad move?
How to pay off credit card debt with a loan
Alternatives to personal loans for debt relief
Bottom line

How do you use a loan for debt consolidation?

Debt consolidation is when you take multiple debts – often credit card debts – and effectively “roll” them into one. A common way to do this is by taking out a personal loan. You then use the funds from the loan to pay off your credit card balances. You are left with a single monthly payment, ideally at a lower interest rate.

Why use a personal loan to pay off credit card debt

Consolidating debt has several advantages. The chief one is to save money.

Potential for lower interest rates

Loans often have lower interest rates than credit cards. The average personal loan interest rate stands at 12.31%, whereas credit cards are all the way up at 24.62%. A lower interest rate can save you a significant amount of money as you pay off your debt. With a lower rate, more of your monthly payment will go towards reducing the principal balance rather than interest charges.

The interest rate you receive depends a lot on your credit score. Consumers with very good to excellent credit will get the lowest rates. That said, personal loans generally have lower interest rates. Their rates also tend to be fixed; they won’t go up as the market changes. In contrast, credit cards often have variable interest rates.

A single lower monthly payment

Balancing multiple credit card bills each month can be challenging. Consolidating balances into one with a personal loan means you simplify your payments. With a single bill, you’re less likely to miss a payment, incur late fees, and hurt your credit score.

Even better, the loan payment is often less than all your credit card minimum payments combined. You’ll end up paying less each month.

Pay off debt sooner

The low APR means more of your money goes towards reducing the principal amount owed. The lower monthly payments mean you can pay more than the minimum. Potentially, you can pay the loan off early and be out of debt sooner.

May build credit

Consolidating debt can help your credit score in multiple ways. A loan can increase your credit mix, if you’ve only had credit card accounts. Lenders like to see that you can handle both installment (loan) and revolving (cards) credit.

When you pay off your credit card balances with the loan, you will reduce your credit utilization rate – the second biggest factor in determining your score.

The loan should come with more affordable and manageable payments making it easy to pay on time. As your lender reports your on-time payments to the credit bureaus, your score will go up.

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

Using a personal loan to pay off high-interest debt can seem like a no-brainer, but it’s not without its detractions. Before you take on more debt, ensure a loan aligns with your financial goals.

Personal loans are a form of debt

You’re replacing one form of debt with another. While personal loans can help you pay off your credit card balances, they are still a debt. It’s very important to make all your payments on time.

Lower interest rates aren’t guaranteed

Personal loans often offer lower interest rates compared to credit cards, but this isn’t always the case. If you have bad credit, you may have difficulty securing a loan at all. And if you manage to get one, chances are it will come with a higher interest rate – possibly higher than what you’re currently paying.

Loans have fees

Loans come with various fees. A few common ones are origination fees, application fees, late payment fees, and prepayment penalties. These expenses can increase the cost of borrowing and cut into any potential savings. Review the loan repayment terms, examine potential fees, and calculate the total cost before committing.

Not changing your spending habits

Paying off credit card balances with a loan will get you out of debt. But you won’t stay there if you don’t change your spending habits. If you continue to charge purchases you can’t afford and carry a balance, you’ll end up where you started.

Put your cards away while you pay off your loan. Once it’s paid off, you can start to charge purchases again. You must follow one rule: only use credit for expenses you can afford to pay with cash. Do this, and you’ll be able to pay your balance in full every month. When you don’t carry a balance, you won’t accrue interest, and you won’t go into debt.

When does a debt consolidation loan make sense?

A debt consolidation loan makes sense if you can secure a one with a lower interest rate. A low APR can save you significant money and make taking on debt well worth it.

A personal loan can be a good choice if your debt was due to a one-off expense or an issue that has since been remedied. Say you had an emergency medical bill you had to use your credit card to cover. Or you lost your job and had to choose between paying rent or your creditors. In these scenarios, a loan can help you pay what you owe and stay out of debt.

When is debt consolidation a bad move?

A personal loan may not be a good choice if your debt stems from overspending. Using a loan to clear balances won’t solve underlying issues. You must change your spending habits and stick to a budget to avoid finding yourself in a similar situation.

Another unfavorable scenario is if you cannot secure a low interest rate loan. The average interest rate for credit cards is high, but if your loan interest is the same or even steeper, this could lead to paying more. Evaluate the annual percentage rate carefully.

Loan fees can be high. Origination fees range from 1% to 8% but can go up to 12% for borrowers with bad credit. High fees can offset any potential savings gained. Look closely at the loan term and fees to determine if it’s worth it.

What is delinquent debt?

Find out if you have a delinquent account.

How to pay off credit card debt with a loan

Paying off credit card debt with a personal loan is a simple process:

1. Apply for a loan. Shop around for loans from online lenders, credit unions, and banks. Try to prequalify and then compare offers. Select the one with the most favorable terms and then formally apply.

2. Pay off credit card debt with loan proceeds. Once approved, the lender will send the funds in a lump sum to your bank account. Use the money to pay your balances. Do not use it for anything else. Some lenders offer to send the money directly to your creditors and may offer a rate discount for doing so.

3. Stop using credit cards during repayment. It’s very important to avoid accumulating more debt as you repay your loan. Using your cards will only put you back in the same position you were in before.

4. Prioritize paying off your loan. Make all of your monthly payments on time to avoid late fees. If you can afford to put extra money towards the loan, do so. But first, ensure your lender doesn’t charge a prepayment penalty.

5. Stay debt-free. Once you’ve paid off your loan, you can use your credit cards again. Do so with caution. Only make purchases you can afford and pay your bill in full each month. Credit card debt is expensive. There’s no reason to find yourself back in the same place.

Alternatives to personal loans for debt relief

As we’ve said, personal loans are not the right solution for everyone. Here are some other methods for paying off credit card debt for good.

Apply for a balance transfer credit card

A balance transfer card can help consolidate your debt into one manageable payment with a 0% APR for an introductory period. The introductory period usually lasts from 12 to 21 months. Take advantage of this time to pay off your balance in full without accruing additional interest.

Like personal loans, balance transfer cards come with fees. Often, you are charged a balance transfer fee of 3% to 5% of the amount transferred. Once again, you must have a good credit score to secure this offer.

Negotiate with your creditors

Credit card companies are usually willing to negotiate with customers if it means they will get paid. You can reach out and ask for a rate reduction. Note that consumers in good standing – recent on-time payments – are more likely to receive a lower interest rate than those with late or missed payments.

If you are suffering a temporary financial setback – divorce, unemployment, medical issues – you may be eligible for a hardship plan. These plans can waive fees, reduce interest rates, lower monthly payments, or extend repayment periods.

Consider credit counseling

A credit counselor can help you manage your credit card debt and your overall financial health. They can suggest ways to pay down your debt quickly, set you up with a debt management plan, or create a realistic budget. A debt management plan (DMP) is when you roll all your debts into one often with a lower interest rate and waived fees. You pay the credit counselor and they distribute the money to your lenders. The benefit of a DMP is that you don’t have to apply for a loan – potentially a huge advantage if your credit is on the lower end.

Try debt relief

There are numerous debt relief options. Two popular methods are the snowball or avalanche method. With the snowball method, you first focus on paying off the card with the lowest balance. If you need quick wins, this is for you. The avalanche method is your best bet if you prefer to save money. Here, you make extra payments on the card with the highest interest rate.

Sometimes, debt is too large and overwhelming to deal with alone. If you don’t think you’ll ever be able to pay it off, debt settlement may be for you. You typically work with a debt settlement company. The company negotiates with your creditor to accept a lump-sum payment that is less than what you owe. The catch is that settling debt comes with hefty fees and damages your credit score. It can still be a way out.

Frequently asked questions

1. What do I need to apply for a personal loan?

You will need to provide proof of identity (a government-issued ID), proof of income (pay stubs or tax returns), and proof of residence (a utility bill or lease agreement). Many personal loan lenders also require employment details and bank account information for funding. Each lender’s requirements may be different.

2. How will using a personal loan to pay off debt affect my score?

Taking out a personal loan can improve your credit score if managed responsibly. When you first apply for the loan, the lender will do a credit check, which can cause your score to dip temporarily. As you pay off your credit card balances and make timely loan payments, your score will significantly improve. That said, if you miss payments or continue to rack up debt, your score will suffer.

3. What should I consider before using a personal loan for debt consolidation?

Compare the loan’s interest rate and fees to those of your credit cards. Ensure the loan will lower your overall repayment cost and help you pay what you owe faster. It’s also important to change your spending habits and avoid credit while paying off the loan.

Bottom line

A personal loan can be your ticket out of credit card debt. Take out a loan and use the money to pay off your balances once and for all. You’ll be debt-free faster and for less.

The next step is to stay that way. Adjust your budget, find more cash, and avoid paying for things with credit that you can’t afford.

If you’re struggling to live within your means or can’t get a personal loan with favorable rates, talk to a credit counselor. They can help you create a realistic budget and get out of debt efficiently for less. No matter your circumstances, it is possible to achieve a debt-free life.

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Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.

Use A Personal Loan To Pay Off Credit Card Debt

Key takeaways

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How do you use a loan for debt consolidation?