Reasons To Take Out a Personal Loan To Pay Credit Card Debt

Triston Martin Updated on Oct 12, 2022

It's easy to confuse things when you're trying to keep tabs on various balances, interest rates, and monthly payments. Not to mention that if you are attempting to pay off many credit cards simultaneously, it may be tough to make a significant difference in your overall debt. One of the possibilities you may look into is paying off your credit card debt with the help of a personal loan. You might save money on interest payments and reduce the time it takes to pay off your credit cards by using this method of consolidating debt. If you understand how consolidating credit card debt with a personal loan works, it will be easier for you to determine whether or not it is something you should do.

Personal Loan vs Credit Card Debt

There are a few distinct varieties of credit, the most common of which are personal loans and credit cards. In such a case, what exactly is a personal loan? A personal loan is a one-time cash advance that you borrow and then afterwards pay back, along with interest. Personal loans may either be secured, where the borrower is expected to put up security, or unsecured. When people discuss receiving a personal loan to pay off credit card bills, they almost always mean an unsecured loan. This is because a secured loan requires collateral in the form of a vehicle or house.

One sort of revolving credit is known as an instalment loan. You can pay off the debt, but you can't have any more money added to it. On the other hand, revolving credit or open-ended credit is a credit represented by a credit card. Making purchases allows you to borrow up to your credit limit, and when you pay off those purchases, you free up additional credit that may be used in the future.

Benefits of Paying Off Credit Cards With a Personal Loan

If you are having trouble getting traction with your current repayment method for credit card debt, one option to explore is obtaining a personal loan to pay off your debt. There are several strong reasons to consider doing this.

Streamline Debt Repayment

When you carry debt on many credit cards, one of the most difficult aspects is ensuring you don't fall behind on your monthly payments. When you consolidate your credit card debt with a personal loan, you reduce the number of payments you are responsible for making each month from many to just one.

This may make it simpler for you to manage your monthly budget. When you have one payment to make each month, you have a lower risk of missing a payment deadline and causing harm to your credit score as a result.

Save Money on Interest

Suppose the interest rate on the personal loan you take out to pay off your credit card bills is lower than the average interest rate you were paying on your cards. In that case, you may be able to come out ahead financially by using the funds from the personal loan. In August 2021, the average annual percentage rate (APR) for credit card accounts that paid interest was 17.13%. Meanwhile, the Federal Reserve reports that the average annual percentage rate (APR) for a personal loan for twenty-four months is 9.39%.

May Improve Your Credit Score

Utilizing a personal loan to consolidate credit card debt may also improve one's credit score. Your total outstanding balances across all your different accounts make up thirty per cent of your FICO credit score. Your "utilization ratio," also known as the percentage of your total available credit that you are utilizing at any one moment, is one of the most significant aspects to consider when it comes to your credit card debt.

Consequences of Using a Personal Loan to Pay Off Credit Cards

Although taking a personal loan to pay off credit card debt offers several clear benefits, one should also be aware of the possible risks associated with this strategy before deciding to pursue it.

You Could End Up With More Debt

The temptation to use your credit cards for more spending is one of the most significant hazards associated with using a personal loan to consolidate debt. If you utilize a personal loan to pay off the amounts on your credit cards and then use those same credit cards to rack up new balances, all you have done is added to your existing mountain of debt. In the process, you might end up hurting your credit score if the percentage of your available credit that you use grows.

Savings Aren't Guaranteed

Even while the interest rates on personal loans often come in at a cheaper rate than those on credit cards, there is no assurance that you will come out ahead financially.