Here are the pros and cons to pay off credit card debt with personal loans.
Although credit card debt held by U.S. consumers has declined during the coronavirus pandemic, some are wondering if it’s wise to take out a personal loan to pay off their remaining debt.
The latest average credit card interest rate is around 14.5%, according to a January article in card rates . Meanwhile, personal loan interest rates are as low as 3% to about 36%, according to bankrate.com.
Debt across the board, aside from personal loan debt, has declined during the coronavirus pandemic. As people adjusted their spending habits and paid down their credit card balances, according to the U.S. Office of the Inspector General. The 2% increase noted in U.S. personal loan debt suggests there was heightened borrowing in the early months of the pandemic, according to Experian.
Here are some pros and cons, when deciding to take out personal loans to pay off your credit card debt.
Pros of taking out a personal loan to pay off credit card debt:
Low interest rates are available for those with good to excellent credit scores.
The biggest perk of using a personal loan to pay off your credit card debt are the lower interest rates compared to credit cards and payday loans. This option is especially appealing for people who carry a significant amount of credit card debt with high monthly interest rates.
You can pay less per month:
Your month-to-month expenses could go down with a personal loan. A personal loan can be ideal for people who have a hard time affording their current credit card payments. But still anticipate having a steady income in the future.
You can consolidate your debt.
Most people have more than one credit card, but a personal loan gives you the option of combining all the money you owe into one payment with a fixed interest rate. Consolidation can simplify your monthly expenses and keep your monthly payments more predictable.
They’re typically unsecured loans.
Personal loans are usually unsecured forms of debt. Meaning you don’t have to use your home or car as collateral to take the loan out. However, you can face fees and hurt your credit score if you don’t make on-time payments.
Cons of taking out a personal loan to pay off credit card debt:
It’s difficult to get a low interest rate for those with bad credit.
You’ll have fewer options for personal loans with a low credit score. If that’s the case, be sure to carefully calculate the amount you’ll owe in interest for both your current credit card and the personal loan.
Payments have less flexibility.
Since personal loans are a type of installment debt, you have less flexibility to change the amount you have to pay each month. That means you can’t decide to pay a little less if you run into an unexpected expense during the month, like you can with credit cards that typically only require the minimum payment amount.
Long repayment terms could cost you more.
Aside from the interest rate, you need to consider the length of the personal loan repayment term. A loan with a low interest rate could still end up costing you more in the long run if the loan repayment term is too long. Typically personal loan repayment terms are between one and 10 years.
Fees can add up.
There are usually fees associated with personal interest loans, including origination fees, late fees, and prepayment fees. Pay attention to any fees so they don’t catch you off guard.
So, is it a good idea to take out personal loans to pay off your credit card debt?
It depends on your financial situation.
Personal loans can be an appealing option to pay off all your credit card debt in full and have one easy monthly payment. But personal loans can be risky if you don’t see yourself having a steady income for the duration of the loan repayment term.
That can be tricky to predict during the coronavirus pandemic. Before agreeing to a personal loan, ask your credit card company if they offer any relief options or deferred payments due to COVID-19.
From student loans to credit card debt , credible's marketplace help you find loans at the most competitive rates