Should I Get a Personal Loan to Pay Off Debt?
Molly is a finance writer based in Portland, Oregon. She also covers software and environmental issues and is always on the lookout for a good vegan donut.
At a Glance
For many people, getting a personal loan to pay off a modest amount of debt is a smart option. In the right situation-and if managed well-a loan can save you money in interest, improve your credit score, and simplify your payments.
In this article, we’ll cover:
When to Use a Loan to Pay off Debt
When you qualify for a personal loan, you use it to pay off your credit card balances. You then make one payment for the same amount every month. Getting a loan to pay off credit debt may seem like an easy choice, but a lot depends on your financial situation. Taking out a loan makes sense when:
- Your debt is moderate and can be repaid within five years
- Your credit score qualifies you for a lower interest rate
- You have the means to pay off the personal loan
- Your spending is under control
Is Credit Debt Worse Than Loan Debt?
When comparing credit card debt to personal loan debt, a lot depends on your ability to repay it. Both can help your credit score if you pay on time-and hurt it if you’re late. Here’s how else they compare:
Credit Cards are Revolving Debt
With credit card debt, you carry a balance and make small, minimum monthly payments as you’re able. Payments are flexible, and a low balance (less than 30% of your total credit limit) helps your credit score. You are subject to higher interest rates, plus late fees and sometimes annual fees.
A Personal Loan is Installment Debt
With a personal loan, your payment is the same amount every month. If well managed, a personal loan can save money through lower interest rates and reduced fees. A loan also diversifies your credit, helping your credit score. The amount due each month may be higher than you currently pay, increasing the chance of default.
Benefits of using a personal loan to pay off debt
There are many reasons why people choose personal loans to pay off debt:
Lower Interest Rates
Paying less interest is a personal loan’s biggest benefit. By lowering your debt’s annual interest rates, you’ll pay more to the principal each month. A loan with low-interest rates will save you money over time and help you get out of debt faster.
Interest rates depend on your lender and your credit history. The better your credit score, the lower your rate. Check your credit score.
If you’re balancing more than one credit card, you might benefit from having one payment. Consolidating debt simplifies bill pay and decreases your likelihood of missing a payment.
Lowered Monthly Payments
For a lucky few, paying off debt with a personal loan may result in lower monthly payments. Consumers with good credit are likely to get lower interest rates.
When a Personal Loan a Bad Idea
The downsides of getting a loan to pay off debt likely sound very much like the benefits above. They’re two sides of the same coin.
If The Interest Rate Isn’t Lower
If you’re not getting the main benefit of a personal loan (i.e., lower interest rates), it may not be worth the effort. Also, check if the lender lumps the origination fee into the loan amount–you don’t want to pay interest on that as well. Learn more about personal loan rates.
If You Have a Low Credit Score
If your credit score is low, you could end up paying a higher interest rate-or you may not qualify.Make sure you’re eligible for interest rates that make a difference. Learn how to raise your credit score.
If You Aren’t in Control of Your Spending
Consolidating credit debt with a personal loan frees up your credit card. For some consumers, it’s this access to credit that landed them in debt. Be careful not to compound debt by overusing your card.
If You Cannot Make Reliable Payments
With a personal loan, you’re locked into a fixed monthly payment and payoff date. Again, payments may be higher than what you currently pay. Before pulling the trigger on a personal loan, do the math to ensure you can handle the repayment terms.
Four Essential Steps of Getting a Loan
If you’ve decided a personal loan is the best way to tackle your debt, be sure to:
- Check your credit score. To get the best interest rates, look at ways to improve your score before you apply.
- Compare 2-3 lenders. If you already have a relationship with a bank or credit union, they may be a good place to start. As you weigh offers, take time to ask questions and study the fine print.
- Get lower interest rates. Remember: it’s not worth moving your debt around if the interest rates don’t go down. Be sure to consider the amount of interest you’ll pay over the life of the loan, as well as any fees.
- Make a plan to pay it off. To make sure your income can cover your loan, put a budget in place ahead of time. Download this free budget template from the FTC.
Learn about applying for a personal loan.
You can be debt-free faster
Find the best personal loans that fit your needs.
How to pay off credit card debt without a personal loan
If you think you can repay your debt in less than 12 months, the savings from a personal loan may not be worth the effort. Consider these two standard do-it-yourself methods:
- Debt snowball: Make the minimum payment on all debts, except the one with the smallest balance. With this bill, pay as much as possible. Once this debt is paid off, move on to the next lowest balance, repeating until you’ve paid off all your debt.
- Debt avalanche: Make the minimum payment on all debts, except the one with the highest interest rate. With this bill, pay as much as possible. Once this debt is clear, move on to the next highest interest rate. Repeat until all debt is paid off.
For some, repaying debt within five years may feel unimaginable. Others have a lower credit score. There are other options. The pros and cons of each depend on your situation.
- A balance transfer credit card: Requires good to excellent credit to get a low enough interest rate to offset the upfront fee. Most have an introductory 0% APR period, but interest rates rise steeply after it ends.
- A debt management plan: Financial advice from reputable, non-profit credit counseling agencies is free. If recommended, you can get a DMP (for a fee) to consolidate payments and cut interest rates.
- 401(k) loans: Beware–defaulting on this loan brings steep penalties and fees. The debt is due in 60 days if you lose your job.
- Home equity loan or line of credit: The potential of home foreclosure makes this an extremely risky loan option.
Learn more ways to get out of debt—or get a payoff plan.