Credit card debt can quickly turn into a cycle of never-ending payments. Thankfully, there are several solutions if you’re looking to get ahead of your debt and pay it off faster.
One way is to apply for a personal loan to effectively move your debt from your credit card issuer to a personal loan lender and hopefully snag a smaller interest rate and better repayment options. By doing so, you’ll likely pay less in interest in the long run and can eventually become debt-free. There are also a few other options that are worth considering if you want to consolidate debt efficiently and cheaply.
Benefits of using a personal loan to pay off credit card debt
Credit card debt has ballooned recently as Americans continue to cope with record-high inflation for everyday goods such as gas and groceries. Unfortunately, trends like this can create a slippery slope since credit cards tend to have high-interest rates, allowing consumers to rack up debt even quicker.
If you’ve found yourself in a credit card debt loop, you may want to think about using a personal loan. Here are two reasons why using a personal loan to pay off credit card debt could make sense for your situation.
Personal loans have lower interest rates than credit cards
According to the most recent Federal Reserve data, the average credit card interest rate in May 2022 was 15.13%. In the same month, personal loan interest rates averaged 8.73% for a 24-month loan.
Let’s say you have $8,000 in credit card debt that you’d like to pay off. If you kept the balance on your credit card, you’d end up paying $1,326 in interest. If, instead, you applied for a personal loan and paid that down over two years, you’d end up paying $747 in interest — that’s a difference of $579 in interest.
And keep in mind that these interest rates are just averages. LightStream, Select’s best overall pick for personal loans, offers APRs ranging from just 3.99% to 19.99% when you sign up for autopay, depending on your terms. So, your savings can be even greater.
You can reduce the number of monthly payments you have
If you happen to have more than one credit card with a revolving statement balance, opting for one concise monthly payment with a personal loan could be helpful. Rather than focusing your efforts in multiple places, you’ll have all your debt in one place and can put your energy into paying that down. Plus, the more money you put toward the personal loan, the faster you can pay it down and the less overall interest you will pay.
Using personal loans to pay off credit card debt doesn’t come without risk, however. Here are a few cons to consider before you apply for one.
Personal loans could lead to more debt
If you decide to take this route, it’s important to use a personal loan as a means to an end. Even if you use one to pay off your debt, you could quickly find yourself with credit card debt once again, along with a personal loan for your former debt if you’re not careful.
If you do take out a personal loan to pay off your credit card debt, make sure you immediately pay off your credit card balances with the cash from the loan. Some lenders, like Marcus by Goldman Sachs Personal Loans, will do this automatically for you when you apply for a loan. Then have a plan in place to pay back your loan and create a budget so you don’t overspend.
A lower interest rate isn’t guaranteed
While there’s a large disparity between the average interest rates for credit cards and personal loans, there’s no guarantee you’ll end up with a better rate. Find out the exact interest rate you’re paying on your credit card and do your best to track down a better interest rate with a personal loan. Factors like your credit score, loan amount and term length can all impact what APR you qualify for.
Check out Select’s personal loan marketplace which will allow you to see what loans you’re pre-qualified or pre-approved for. It’s free, will not impact your credit score and allows you to compare interest rates from different lenders.
Personal loans have fees
As you’re researching different lenders, consider any fees you may be charged for the personal loan, which can include application fees, origination fees, prepayment penalties, late payment fees, returned payment fees or payment protection insurance. If the difference in interest rates is small between your credit card and personal loan, the fees can negate any potential savings.
If a personal loan sounds like a viable solution for your financial needs, here are a few of Select’s favorite lenders to choose from. Select ranked LightStream as the best personal loan lender overall because of its low interest rates and flexible terms, but PenFed is also good for those seeking smaller loans and Discover for those seeking fast funding. These loans also don’t have origination or early payoff fees.
Another way to consolidate credit card debt
While taking out a personal loan is a solid option for paying off credit card debt, another way to go about it is to sign up for a balance transfer credit card that comes with a 0% introductory APR. With this type of card, for a specified amount of time, its balance will not incur any interest as long as you make the minimum payment each month.
For example, the Wells Fargo Reflect® Card offers a 0% introductory APR for 18 months from account opening (after, 15.99% – 27.99% variable APR) on purchases and qualifying balance transfers. (See rates and fees.) It’s also possible to extend that 0% APR for three more months by making the minimum payments on time throughout the intro period. Balance transfers made within the first 120 days also qualify for the introductory rate.
That means you could end up earning up to 21 months of interest-free financing on your current debt as long as you make the minimum payments. If, for instance, you have $8,000 in credit card debt to pay off and can make $400 monthly payments during the 0% intro period, you won’t pay a dime in interest.
Keep in mind, however, that there is an introductory fee of either $5 or 3% of the amount of each balance transfer, whichever is greater, for 120 days from account opening. After that, up to 5% for each balance transfer, with a minimum of $5.